With this it will be convenient to discuss the following:
Government amendments 113 to 117.
That schedule 7 be the Seventh schedule to the Bill.
These amendments make changes to ensure that schedule 7 applies to controlled foreign companies in the same way that it applies to UK investment companies. Schedule 7 allows companies, including CFCs, to elect prospectively to change the currency in which they prepare their accounts—their functional currency—for tax purposes. It also stops changes in companies’ functional currency having a tax effect until the accounting period following the change. The deferral of a tax effect to the change in functional currency blocks an avoidance scheme that allowed companies retrospectively to crystallise foreign exchange losses for tax purposes. Following the publication of the Bill, it came to HMRC’s attention that certain provisions in the CFC code prevent the restriction on the timing of the tax effect of a functional currency election from applying to CFCs.
The amendments ensure that UK resident companies with interests in CFCs will not be able to change the functional currency of the CFC with the benefit of hindsight to realise a foreign exchange loss for tax purposes to reduce or avoid a CFC apportionment. The amendment will apply to multinational groups with CFCs and protects tax revenue in the low hundreds of millions per year.
Although the amendments may at first sight appear to be pre-empting the wider CFC reform, their effect is to ensure that schedule 7 applies to CFCs in the same way as it applies to UK investment companies. Schedule 7 benefits companies by allowing them to elect prospectively to change their functional currency for tax purposes. The amendment is, therefore, not counter to the direction of CFC reform. The amendments ensure that the avoidance opportunity that the original measure was designed to close is blocked for controlled foreign companies in the same way that it is blocked for UK investment companies. I therefore urge the Committee to accept the amendments.
‘Amendments of ICTA
In Schedule 24 to ICTA (assumptions for calculating chargeable profits, creditable tax and corresponding United Kingdom tax of foreign companies), in paragraph 4 (reliefs under Corporation Tax Acts dependent upon the making of a claim or election), after sub-paragraph (2) insert—
“(2B) For the purposes of sub-paragraph (1) an election under section 9A of CTA 2010 (designated currency of a UK resident investment company) is not to be regarded as an election upon which relief under the Corporation Tax Acts is dependent, and sub-paragraph (2)(b) does not apply in relation to such an election.
(2C) But if, by notice given to an officer of the Board, the United Kingdom resident company which has or, as the case may be, any two or more United Kingdom resident companies which together have, a majority interest in the company so request, the company shall be assumed (subject to section 9A(2) of CTA 2010) to have made an election under section 9A of that Act in the form specified in the notice (and accordingly that section and section 9B of that Act apply to determine the effect (if any) of that election).”’
Amendment 114, page 157, line 15, after ‘arises’ insert ‘(“the relevant period”)’.
Amendment 115, page 157, leave out lines 16 to 19 and insert—
‘(b) a change in the company’s functional currency (within the meaning of section 17(4) of that Act) as between the relevant period and a period of account ending in the 12 months immediately preceding that period.’.
Amendment 116, page 157, line 31, after ‘arises’ insert ‘(“the relevant period”)’.
Amendment 117 , page 157, leave out lines 32 to 35 and insert—
‘(b) a change in the company’s functional currency (within the meaning of section 17(4) of that Act) as between the relevant period and a period of account ending in the 12 months immediately preceding that period.’.—(Mr Gauke.)