It is a pleasure to serve under your chairmanship this morning, Mr Sheridan. The clause is designed to align the tax treatment of transfers between UK resident companies with transfers between UK and non-UK resident companies, by allowing transfers between UK companies to be treated as distributions for the purposes of UK tax legislation. I understand that the proposal arises from the joint working group and was identified as an area of difficulty by Her Majesty’s Revenue and Customs. Has the Minister considered the impact of cuts to HMRC’s budget on its ability to deliver such technical changes, which go back to a repeal of advance corporation tax by the Finance Act 1998?
As a rule, 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, of course, exist—for example, for distributions of company shares in the event of winding up.
In 2009, new rules replaced the system for tax and dividends from the UK and overseas companies following a legal ruling the year before in which the European court decided to exempt European Union 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.
The 2009 Act, however, requires some alterations. As is often the case with technical regulations, unintended issues arose. Some were addressed in the Finance Bill last year, but they need further attention today, hence the reason for the clause. The changes will apply only to groups of companies operating in the UK and making distributions between themselves. Is the Minister aware of any anomalies relating to the tax treatment of distributions from non-UK companies, and will the changes have any impact on dividends and trusts that receive dividends from such companies? How many transfers caught by this rule does he estimate take place every year and how many companies does he estimate that it applies to?
In the impact assessment it was noted that there would be a small cost to HMRC associated with this measure. Has the Minister calculated what the cost will be and why it occurs?
Mr Sheridan, good morning to you. It is good to see you in your Chair. As the more observant members of the Committee will note, whenever there is a Chair of the Committee from the Opposition, the sun shines. One could be suspicious. This may be the workings of the Chairman’s Panel, because it could be that someone in Brussels is manipulating the clouds above our heads. That is the purpose of the question that I wish to pose. In our previous sitting, there was some ambiguity about the slavish support for European Union legislation impeding our ability to set our own taxes in this country. That emanated from the Conservative party. I can confirm that all the legislation that handed powers over to Brussels to interfere with our ability to determine our own taxes was initiated and agreed by the Conservative party in power.
I appreciate that the Ministers are distracted, because at the current time there are 17 directives or draft directives relating purely to financial services and their Treasury remit on the table in Brussels at the moment. Ministers must be prostrating themselves at the altar of Brussels on a regular basis. Has anything in the clause been impacted on by the European Union? Has the Government’s freedom to introduce their proposal been restricted by what the Conservative party forced through Parliament when it handed over taxation powers to the European Union?
Mr Sheridan, it is a great pleasure to serve under your chairmanship this morning and to speak about the clause, which provides a certainty on the tax treatment of distributions in the form of transfer of assets and liabilities that is welcomed by companies.
The changes ensure that transfers between UK resident companies can be treated as income distributions for the purposes of corporation tax. Such transactions are sometimes referred to as distributions in specie. Tax treatment will become aligned with that which usually applies when a non-UK resident company is involved in a transfer. We have also taken the opportunity to clarify distributions rules where they overlap in particular respects.
The changes made by the clause will repeal legislation that prevents transfers of assets between UK resident companies from being treated as income distributions. Provided that such transactions otherwise fall within the scope of the distributions legislation, they will be treated as income distributions and will in most cases be exempt from corporation tax. The changes will also ensure that the confusing overlap in the scope of the two different definitions of the term “distribution” is removed. They will affect companies for which distribution treatment is currently given through HMRC guidance. We do not expect any Exchequer impact, and hon. Members should note that the taxation press have welcomed the clause.
I shall try to answer some of the questions asked by hon. Members. First, the measure affects only transfers between companies in the same group, so there will be no impact on dividends paid to shareholders, including trusts. Will there be any HMRC costs related to the provision and will HMRC have the capacity to deal with it? This is a simplification measure. There will be less of a burden on HMRC, because fewer clearances will be needed, so if anything, the provision will reduce the demand placed on it. On cost, there is no tax impact as such. Relief is currently available through guidance, but the clause makes it statutory. There are no implications related to distributions for non-UK companies. HMRC does not gather information on the number of transfers that will be affected by the measure, so it is not possible to provide an answer to that question. Finally, I am sorry to disappoint the hon. Member for Bassetlaw, but no EU implications relate to the measure.
I hope that is helpful to the Committee. The clause will provide certainty on how corporation tax distributions legislation will apply to transfers of assets and liabilities between UK resident companies, and I hope that it will stand part of the Bill.