Clause 9

Part of Finance (No. 2) Bill – in a Public Bill Committee at 6:00 pm on 19 October 2010.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 6:00, 19 October 2010

The clause is designed to tidy up the legislative rules surrounding the corporate tax treatment of dividends and other distributions following major reforms in the Finance Act 2009. Careful work by the solicitors Freshfields Bruckhaus Deringer and others has pointed out a set of anomalies that appear to have  provoked officials at the Treasury to generate a new framework in which to tie up some of the loose ends that were left behind, and to reiterate the original intentions of HMRC in making that 2009 amendment to the law.

Generally speaking, in this country we permit a company to make dividend distributions only up to the balance of earnings that are available for distribution according to its most recent audited accounts. Some exceptions exist, usually in respect of distributions of shares of the company for winding up and in other limited situations.

In 2009, new rules replaced the system for taxing dividends from UK and overseas companies following a legal ruling the year before in which, after the FII Group litigation in the High Court in 2008, the European Court decided to exempt EU and European economic area residents’ subsidiary distributions from tax in the UK rather than taking an approach to taxing dividends depending on the residency of the dividend payer. That decision raised the need for HMRC to become compliant with European Union law—here we are again, all good Europeans.

At that point, HMRC could have opted either to introduce an international or an EU exemption, or to remove the domestic exemption from UK to UK dividend distributions. In the Finance Act 2009 HMRC seemed to opt for the second option, placing both UK and non-UK companies within the charge to corporate tax on income, although there were extensive exemptions to those charges. A series of technical and unintended problems arose, however. The rules were made more complex because of the differing treatment of distributions, whether they were of an “income nature” or of a “capital nature”. Unfortunately the term “of a capital nature” was insufficiently defined in the legislation, and here we are, therefore, with clause 9.

I have a series of technical questions to ask the Minister. First, will he set out clearly the alterations in yield for the Exchequer compared with the original arrangements, for instance because of the change in treatment of foreign dividends? Is it really the case that about £200 million would otherwise have been collected had EU dividends not been exempted, or do I have an incorrect figure?

Secondly, why is it reasonable in paragraph 5 of schedule 3 to make those changes retrospective in respect of distributions made on or after 1 July 2009? Is there not a danger, as ever, in retrospective taxation arrangements, and how will the election to opt out of that retrospective arrangement operate in practice? Is that done for a particular reason, and if so can the Minister expand upon the reason?

The explanatory notes state that the current rules have created circumstances in which some

“UK companies in receipt of UK distributions faced an unexpected tax charge.”

What is the scale of those unexpected charges, and is the retrospective nature of the changes designed to compensate companies for those arrangements? In my reading, that seems to be the logic behind the schedule. Those are all technical points, and I would be grateful if the Minister addressed them.