Interest in respect of unlawful ACT

Finance (No.3) Bill – in a Public Bill Committee at 10:30 am on 11th December 2018.

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Photo of Jonathan Reynolds Jonathan Reynolds Shadow Economic Secretary (Treasury) 10:30 am, 11th December 2018

I beg to move amendment 151, in clause 84,page 62, line 5, at end insert—

“(11) The Chancellor of the Exchequer must review the effectiveness of the remedy introduced by this section, together with section 85, and lay a report of that review before the House of Commons within one year of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the effectiveness of the new statutory remedy one year after its adoption into law.

Photo of Nadine Dorries Nadine Dorries Conservative, Mid Bedfordshire

With this it will be convenient to discuss amendment

Amendment 152, in clause 84, page 62, line 5, at end insert—

“(11) The Chancellor of the Exchequer must review the expected effect of the remedy introduced by this section, together with section 85 on corporation tax receipts and lay a report of that review before the House of Commons within one year of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the impact of the new statutory remedy on corporation tax receipts.

Clause stand part.

Clause 85 stand part.

Photo of Jonathan Reynolds Jonathan Reynolds Shadow Economic Secretary (Treasury)

It is lovely to see you in the chair again today, Ms Dorries. I will speak to clause 84 and our amendments which, as you described, also cover clause 85, which is a supplementary clause.

Clause 84 relates to a somewhat historic issue—the payment of advance corporation tax known as ACT. ACT was payable when companies distributed dividends to shareholders before main corporation taxes were due. These payments could then be offset in profit and loss calculations potentially to reduce the overall tax bill. ACT was abolished under Gordon Brown’s tenure as Chancellor in 1999 to prevent its abuse mitigating revenues to the Exchequer, and to encourage reinvestment rather than excessive dividend payments.

However, there are some legacy cases relating to ACT claims. The clauses are the result of a legal judgment from the Supreme Court test case that impacts those claims—that of Prudential Assurance Company Limited and HMRC on 25 July 2018. This case gave rise to a number of judgments in relation to ACT. I will not read it in full—

Photo of Jonathan Reynolds Jonathan Reynolds Shadow Economic Secretary (Treasury)

I know. Prudential put the case that it was entitled to compound rather than simple interest on the repayment, given that some of the tax that was levied, it claimed, was in breach of EU law. However, the Supreme Court disagreed with this analysis and subsequently found in favour of HMRC. The amounts at stake are very significant—they were listed as £4 billion to £5 billion according to media reports at the time. Therefore, the Supreme Court decision is clearly welcome when public finances are under such severe pressure.

The test case has helped to clarify outstanding issues relating to ACT. It is important that the Statute book reflects this decision and is fully up to date to remove any uncertainty for taxpayers with historic claims. It is an additional bonus that the Supreme Court decision has not created a further liability for HMRC in repaying compound interest.

However, we must be clear whether this change, while it relates to a legacy tax, will have any impact on current taxation matters. This is especially pertinent when it relates to corporation tax receipts.

Labour has tabled two amendments. We may not necessarily press them to a Division, but they will be useful to our discussions. Amendments 151 and 152 would, respectively, call on the Government to review the effectiveness of this new statutory remedy one year after its adoption into law and review its impact on corporation tax receipts. These reviews would play an important role in judging the overall impact of the judgment. As I have outlined, the liabilities at stake are very significant. It is essential that we have a clear understanding of whether the provision will give rise to any changes in revenue collection. I call on Members to look at the amendments and ensure we have the clarity and transparency needed to scrutinise the measure in full.

Is the Minister aware of any further issues that may relate to historic ACT claims that we should be aware of? Given that the numbers at stake are so large, we seek reassurance that no other potential liabilities could arise for HMRC in relation to legacy challenges.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

I thank the hon. Gentleman for his contribution. On his specific question of whether any other issues related to ACT might give rise to liability to HMRC, I am not immediately aware of any, but I will write to confirm whether that is the case.

The advance corporation tax or ACT system, which was repealed as long ago as 1999, has been found to be unlawful in certain circumstances. Clauses 84 and 85 provide a new legal remedy for claims against HMRC in limited circumstances. A number of cases involving ACT have been argued before the courts over a lengthy period. This litigation continues but it is now clear that some ACT was paid unlawfully.

Earlier this year, the Supreme Court overruled an earlier decision of the House of Lords from 2007. That has created uncertainty as to what remedies might be available where unlawfully paid ACT was repaid or set against corporation tax before claims against HMRC were started. The law requires that in those cases there needs to be a remedy. The courts are able to consider that but, given the uncertainty, it is desirable for Parliament to consider what that should be in order to provide a fair and balanced outcome.

Clauses 84 and 85 help to deal with the uncertainties by providing a remedy aimed at those circumstances. The new remedy takes the form of an order requiring HMRC to make interest payments according to specified calculation rules. The clauses provide that interest is payable on the overpaid tax at an appropriate rate. There is no need to provide for the tax itself to be repaid because, in all of the cases affected by the clause, tax has already been repaid or offset against corporation tax that was otherwise due.

The interest rate is specified in the legislation and is in line with rates applied to tax repayments during the relevant period. The effect is to make a remedy available in line with the other repayments of overpaid tax and to ensure that an appropriate and fair remedy is available to claimants in this litigation.

Amendments 151 and 152 seek a review within one year of the passing of the Bill of the effectiveness of the remedy and the effect of the remedy on corporation tax receipts. The remedy provided in clauses 84 and 85 is a limited one to address a specific area of uncertainty following a Supreme Court decision, and where there is ongoing litigation. The litigation has been under way for many years and may well be ongoing for a number of years yet. The remedy is not exclusive and the court may award a different remedy. It will be potentially unhelpful, and may not be possible, to seek to comment on the effectiveness of the statutory remedy when relevant litigation is still ongoing. We have already published a tax impact and information note, which sets out the expected impacts, including on the Exchequer. The new remedy is designed to remove uncertainty to the benefit of both HMRC and the claimant companies, and I therefore commend the clauses to the Committee.

Amendment, by leave, withdrawn.

Clause 84 ordered to stand part of the Bill.

Clause 85 ordered to stand part of the Bill.

Clause 86