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Clauses 27 to 29 concern, in part, the introduction of new measures on tax avoidance. We have heard throughout our discussion of the Bill—no doubt we will hear more as our proceedings continue—about the seriousness of tax avoidance. Of course, the Opposition would support the Government on any steps to combat tax avoidance, but there are worries that the attempts of Her Majesty’s Revenue and Customs to address it have not been as successful as we might have hoped in recent years.
The latest figures for 2011-12 show an increase in the tax gap of £1 billion—to £35 billion—compared with the previous year. According to a report by the Public Accounts Committee in December 2013, the amount lost to the Exchequer is underestimated, so the actual cost of tax avoidance could be considerably higher. We are worried that HMRC has not tried to gather intelligence about how much tax revenue is lost through aggressive tax avoidance schemes, meaning that any additional amount is not included in the figures cited.
In setting the context for clause 27, I would like to point to recent evidence brought to light by the PAC report, which identified a real-terms reduction in the revenue collected by HMRC in 2011-12 and 2012-13. The Committee argued that HMRC, in its actions to pursue unpaid tax, had not clearly demonstrated that it was on the side of the majority of taxpayers who pay their taxes in full. Questions were asked about whether HMRC was using the full range of sanctions at its disposal to pursue all unpaid tax vigorously, and about whether its measure of the tax gap captured all the avoided tax that it should be collecting.
Concern was also expressed about the possibility that HMRC had massively overestimated how much it would collect from UK holders of Swiss bank accounts. For 2013-14, it has so far collected only £440 million of the £3.12 billion predicted at the time of the 2012 autumn statement. All that sets the scene for the Opposition’s suggestion that HMRC could be doing more to deal with tax avoidance.
The clause will amend legislation that applies to holdings in unit trusts, open-ended investment companies and offshore funds that are treated as loan relationships, meaning that distributions from any type of fund in which a company has a relevant holding are not treated as distributions for corporation tax purposes and instead fall within the remit of loan relationships legislation. It also introduces a new anti-avoidance provision that sets out that if a company has a holding in a fund that is treated as a loan relationship and arrangements are entered into to obtain a tax advantage for any person, adjustments must be made to counteract such an advantage.
It is worth mentioning the fact that unit trusts and open-ended investment companies are by far the most popular types of investment funds. In a unit trust, the fund manager buys bonds and shares in companies on the stock market on behalf of the fund. The fund is split into units, which are what the investors buy. The fund manager creates units for new investors and cancels units for those selling out of the fund. The creation of the units can be unlimited; hence why the fund is open-ended. The price of each unit depends on the net asset value of the fund’s underlying investments and is priced once a day, which means that the value of the units bought directly reflects the underlying value of the investment.
An open-ended investment company in the UK is a company or fund that is structured to invest in other companies and is able to adjust constantly its investment criteria and fund size. The company’s shares are listed on the London stock exchange and the share price is based largely on the fund’s underlying assets. There are no bid and ask quotes on OEIC shares; buyers and sellers receive the same price.
An OEIC fund issuer is a company that creates and cancels shares when investors come into and go out of the fund. The shares directly reflect the value of the assets that the fund manager has invested in. When shares are issued, the fund receives money and invests it. When eliminating shares, the issuer pays out from its fund. Such funds can mix different types of investment strategies such as income growth, and small cap and large cap.
The clause follows on from the Government’s announcement in Budget 2013 of a review of the law governing the corporation tax treatment of corporate debt and derivative contracts, with the objective of simplifying and tightening the legislation to make it more resistant to abuse. The majority of those reforms are scheduled to be implemented in the 2015 Finance Bill.
The Government consulted on modernising the taxation of corporate debt and derivative contracts, and published a summary of responses in December 2013. The key areas for consultation were: refining the core structure of the regime, including clarification of the role to be played by accountancy in determining taxable amounts; basing taxable amounts on accounting profit and loss, rather than, as now, taking account of debits and credits appearing in any part of a company’s financial statements; combining the rules that apply separately to loan relationships and derivative contracts; revising some of the detailed rules and areas of connected party debt, intra-group transfers, partnerships, foreign exchange movements, hedging, debt restructuring, and the treatment of bond funds and certain particular types of instrument; and introducing an integrated and comprehensive anti-avoidance provision.
Under the existing approach, the treatment of loan relationships held or owed by corporate partners through partnerships is set out in the Corporation Tax Act 2009. The intention of the clause is to clarify and amend provisions in chapter 3 of part 6 of that Act, which are known as the bond fund rules. The changes include adding a provision to clarify how distributions are treated when those rules apply.
The bond fund rules intend to tax UK corporate holding units in certain collective investment schemes as if the units were loan relationships to prevent the deferral or avoidance of tax. If more than 60% of a fund’s assets are debt-type at any time in the investor’s accounting period, the investment is treated as a creditor-loan relationship—the fund is the lender of money—and charged on a fair value basis. All returns of interest to the holder are included in the calculation and any distributions in respect of a holding are not treated as such for tax purposes, presumably because distributions can reduce a fund’s taxable income.
The rules have, on occasion, been used or exploited for avoidance purposes—for example, certain assets have been included in a fund presumably to engineer fair value losses for a low rate of tax, or none at all. The new provisions will apply to any arrangements that relate to a bond fund and allow reasonable adjustment to be made to counteract a tax advantage obtained by the company holding the investment in a fund or by any other person. Essentially, the clause is a move to prevent funds, or members of funds, from deliberately manipulating assets and balance sheets to gain a tax advantage.
I have some questions about the clause—they pick up on points from the consultation—to which I hope the Minister will respond. What is the Government’s analysis of the impact that the measures will have on the level of investment in OEICs and unit trusts? How does HMRC define gaining a tax advantage? What factors will be taken into account when HMRC considers whether a deliberate tax advantage has been sought? What analysis have the Government carried out of the revenues lost to the Exchequer through the exploitation of the existing bond fund rules that the clause tries to address? What is the intended scope of the clause? For example, will it impact only small groups of taxpayers with small private funds—in other words, a very limited selection of taxpayers—or will it have tax implications for taxpayers in more widely accessible funds, such as those meeting the genuine diversity of ownership condition?
I ask those questions because the Government’s consultation response summary states:
“Current anti-avoidance provisions across the loan relationships and derivative contracts regimes reflect a piecemeal approach to blocking particular schemes as they come to light; this has been a source of complexity.”
Will the Minister explain how provisions in the clause, and generally, reflect the more co-ordinated approach that the Government seem to wish for?
It is a pleasure to serve under your chairmanship, Mr Streeter.
I speak as one of two members of the Public Accounts Committee serving on this Committee—the hon. Member for Redcar is also a member—and I want to respond to what the hon. Lady said about one of the reports that we issued in December. I do not think she was trying to say that Lin Homer, the chief executive of HMRC, was a light touch when it came to tidying up any sort of tax-avoidance issues. In fact, under strong questioning from the PAC, it became rather obvious that while we might like some of these things out in the open so that we can see what HMRC is doing, a lot of detailed work is going on behind the scenes. If the hon. Lady read not just the conclusions of the report, but the interview with Lin Homer during which I, the hon. Member for Redcar and the Chair of the Committee all interacted with the chief executive of HMRC about these issues, she would see how much detailed work is going on to stop the type of tax avoidance that no member of this Bill Committee would condone.
I am grateful to the hon. Member for Kilmarnock and Loudoun for her contribution. Contrary to what she said, the evidence is that the market for tax-avoidance schemes is shrinking and that HMRC is securing greater revenues from those who try to avoid paying their fair share. For example, disclosures of tax-avoidance schemes fell by almost 50% between 2011-12 and 2012-13—from 116 to 59—and 80% of the avoidance cases heard in the courts are being won by HMRC. In 2012-13, HMRC won 26 of the 32 avoidance cases that it pursued, protecting £2.25 billion in revenues. In 2013-14, HMRC won 29 of 37 cases, protecting nearly £2.5 billion by mid-March 2014. Since April 2010, HMRC has collected more then £750 million in additional tax revenues from the UK’s 6,000 wealthiest individuals, so there is evidence that HMRC is improving its tax-avoidance measures.
I will have to get back to the hon. Lady on that very specific question. I am not sure what the progress is on that, but I think she would have to agree that there is evidence of a successful improvement through the anti-avoidance measures that the Government have been taking.
As the hon. Lady said, clauses 27 and 28 arise from the reviews that HMRC is undertaking on the rules for loan relationships and derivative contracts, which involve a major consultation exercise. Most changes to the rules will be in the 2015 Finance Bill, but clauses 27 and 28, which are both technical, have already been agreed with the consultation group.
The hon. Lady specifically suggested that the measures will be unsuccessful. In fact, the known avoidance schemes that are behind the introduction of the changes have already been closed, and clause 27 will provide safeguards against similar schemes. She is not right to think that the measure will not be successfully implemented.
I want to ensure that the hon. Lady understands that I was not suggesting that the measures would not be successful. I was simply raising a question about what analysis the Government have carried out and asking her to explain why she thought this approach was more co-ordinated.
As I said, a major consultation is taking place on the rules for loan relationships and derivative contracts. Most measures that arise from that will be in the 2015 Finance Bill. Clauses 27 and 28 are not in fact piecemeal, but deal with specific avoidance schemes.
Clause 27 changes the corporation tax rules on corporate debt and derivative contracts. The changes arise from a consultation on the modernisation of those rules that the Government launched last June. Consultation has been proceeding since then with a wide range of companies, representative bodies and other interested parties. These changes are being made in advance of wider changes to the regime that will be included in the 2015 Finance Bill. They amend what are known as the bond fund rules, which ensure the consistent tax treatment of loans or other debt-type assets, whether held directly or within a fund—for instance, in a unit trust. Generally, loans or similar assets held by a company are taxed under the specific legislation that applies to loan relationships, but companies could sidestep those rules and secure a different tax treatment simply by holding the assets in a fund rather than directly.
The bond fund rules therefore provide that, in some circumstances, holdings in funds are treated as loan relationships. However, the bond fund rules themselves have been used in corporation tax avoidance schemes in the past. Clause 27 will prevent avoidance by introducing new and stronger anti-avoidance protection into the rules, thus ensuring that the rules work correctly and cannot themselves be used for tax avoidance. It provides that if arrangements are made to get a tax advantage through a fund holding within the bond fund rules, that tax advantage is to be reversed.
The clause also makes a minor change to ensure that all distributions from a fund holding that falls within the bond fund rules are taxed as loan relationships and are not treated as exempt dividends, as can currently happen. Without that change, if a fund pays a dividend that reduces the fund’s value, the recipient might get the benefit of a tax loss when no loss has been suffered. The change will ensure an appropriate and fair result in all cases.
Clause 27 will ensure that legislation can achieve its intended purpose and cannot be exploited for avoidance. It supports the Government’s objectives of fairness and certainty in the tax code.