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We now turn to the final clause of chapter 3 and the general provisions for corporation taxation. The clause relates to worldwide debt cap provisions; it is of particular relevance to multinational groups of companies, and was originally announced in the autumn statement in 2013. I shall not go into the detail of the clause—I will leave that to the Minister—but by way of background I shall put into context the couple of queries that I want to make on the Committee’s behalf.
The worldwide debt cap was first introduced in the Finance Act 2009 under the previous Labour Government, as part of a package of changes to the taxation of companies on their foreign profits. It limits the corporation tax deduction for interest and other finance expenses of the UK members of large groups of companies, so that such expenses cannot exceed those of the worldwide group.
Clause 38 will makes two key changes: the first protects revenue and puts beyond doubt the way in which the grouping rules apply, by making three clarifications; the second, according to the explanatory notes, makes a “minor change” to the power to make regulations relevant to the potential impact of the provisions on whole business securitisations.
I should be grateful if the Minister would elaborate on some of the comments made in the tax information and impact note, and in particular new paragraph (za), which relates to the tax treatment of financing costs and income interpretation, and explain whether that is intended to provide greater regulation for whole business securitisations, or to relax the rules around the worldwide debt cap in respect of such restructurings. The final line in the explanatory notes for the clause states that the new regulation-making powers will
“enable companies involved in whole business securitisations to remain bankruptcy remote”,
yet as far as I can see, the tax information and impact note makes no reference to that. It would be helpful to the Committee if the Minister could clarify that point.
Concerns have also been expressed about the first measure being introduced “due to perceived abuse”. If the first measure, which clarifies the grouping rules, is indeed in response to perceived abuse and, in the Government’s words, to “protect revenue”, why is it not expected to have any Exchequer impact? The tax information and impact note suggests that the projected impact is not just negligible, but nil. If there is perceived abuse, the measures are surely intended to prevent it, meaning increased revenue to the Exchequer from closing down potential opportunities for abuse. If the abuse is only perceived, as opposed to actual abuse, will the Minister explain why the measure is necessary and give a helpful introduction to the legislation?
Clause 38 makes two changes to the rules for the tax treatment of financing costs and income, commonly referred to, as we have heard, as the debt cap. The first change puts beyond doubt the way in which the grouping rules apply. The second change amends the powers to make regulations designed to make whole business securitisations easier.
The debt cap rules were introduced in 2010 to limit the tax deduction for the finance expenses of the UK members of multinational groups of companies, so that UK companies do not avoid tax by paying excessive amounts of interest. The rules used to identify the members of the group to which the provisions apply were based on the grouping rules already used elsewhere in tax legislation. Some groups have claimed that the rules do not have their intended effect, which happens when a group of companies includes structures that are not companies and that do not have ordinary share capital in the way that a company would. The amendment is designed to put it beyond doubt that entities that do not have ordinary share capital, and their subsidiaries, can be members of a group for the purposes of the debt cap rules. The second change addresses concerns that can arise when the debt cap rules are applied to whole business securitisations.
The changes made to the grouping rules by clause 38 will ensure that the definition of a group for debt cap purposes can deal correctly with an entity that does not have ordinary share capital. The limit to relief for interest and other finance expenses applies to companies that are 75% subsidiaries of the ultimate parent of the group. Some groups have argued that an entity without ordinary share capital, and its subsidiaries, cannot fall within that definition, so they are not caught by the debt cap rules. The amendment ensures that the entities do fall within the group and further makes it clear that they are included even when the different entities are held indirectly or controlled in other ways. The changes will take effect for accounting periods starting on or after 5 December 2013.
The debt cap rules include a regulation-making power that allows regulations to be made to help companies that raise finance by arrangements known as securitisations. The regulations would benefit companies involved in securitisations by allowing them to transfer tax liabilities arising from the debt cap legislation between companies. The change ensures that regulations, if required, would be simpler and more efficient for both business and HMRC than the regulations that can be made under the existing power.
As for whether the changes to the regulatory powers relax the rules, the answer is no. The changes are designed to allow regulations to be made where needed. The regulations will allow a company that is party to a whole business securitisation to pass on its tax obligations to another group company. The new paragraph (za) in the securitisation legislation is intended to enable simpler regulations.
As for why no extra revenue is included within the tax information and impact note, the measure is about revenue protection, not revenue raising as such, so the debt cap has a deterrent effect. The difficulty is that we do not have an effective debt cap. Existing revenue that is coming into the Exchequer is put at risk, and I am sure the Committee would not want to permit that. Through the clause, we are preventing a loophole from being exploited, rather than expecting additional revenue to come in as its consequence. With those points of clarification, I hope that the Committee will support the clause.