Corporate interest restriction

Finance (No. 3) Bill – in a Public Bill Committee at 3:00 pm on 29th November 2018.

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Question proposed, That the clause stand part of the Bill.

Photo of George Howarth George Howarth Labour, Knowsley

With this it will be convenient to discuss that schedule 10 be the Tenth schedule to the Bill.

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

Clause 27 and schedule 10 make changes to ensure that the corporate interest restriction rules will continue to operate as intended, limiting the amount of interest expense and similar financing costs that a corporate group can deduct against its taxable income. The UK’s corporate interest restriction rules were announced at Autumn Statement 2016 and took effect from 1 April 2017. These rules prevent groups from using financing expenses to erode their UK tax base, where these expenses are not aligned with the group’s UK taxable activities. These rules are complex because they operate at both the worldwide group and individual entity levels. As businesses have begun to apply them, HMRC has identified some technical amendments that are needed to ensure that the rules operate as intended and to address practical compliance issues.

Clause 27 and schedule 10 make a number of technical amendments to the interest restriction rules. To ensure the rules are applied as intended, the schedule will clarify that real estate investment trusts are in scope of the interest restriction rules, but that they do not suffer a double restriction of financing costs where they are highly leveraged. It will confirm that where a company holds a significant pension fund asset or a deferred tax asset, or where the company is reimbursed for certain variable operating costs, it is not prevented from applying the alternative rules for public infrastructure. It will provide confirmation of how the rules deal with capitalised interest.

To ease the practical operation of the rules, the schedule will extend certain timings, in particular for appointing a reporting company and for submitting an interest restriction return, following an acquisition. The schedule will allow unused amounts and debt cap to be carried forward for a new holding company that is inserted into the group structure, but the shareholders of the group remain substantially unchanged. To align the rules more closely with the normal UK tax rules the schedule will require, where appropriate, employee remuneration that is not paid within nine months to be disregarded in the calculation of a group’s earnings, until it is paid. It will also amend the calculation of the group’s financing costs to ensure that it is not distorted when a debt is released by a company that is connected to the group but not in it.

Finally, this schedule will allow HMRC to specify information that is reasonably required for risk assessment purposes, which is to be included in the interest restriction return. This clause and the accompanying schedule make amendments to ensure that the interest restriction rule continues to operate as originally intended. I commend this clause and schedule to the Committee.

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

We have before us in clause 27 another tweak to the 2017 legislation, which originally brought about this change. The clause is designed to bring about technical amendments to the corporate interest restriction rules. Again, the Opposition are supportive of any measure that aims to correct the tax situation, which could potentially be exploited. These rules restrict the ability of large businesses to reduce their taxable profits through excessive UK interest.

The explanatory notes tell us that this is part of the Government’s policy to align the location of taxable profits with the location of economic activity—not before time, many people in the country would argue. We are very much looking forward to seeing the Government rigorously apply this approach to the multinational companies in the UK, which mysteriously report profits quite unrelated to their tax bills. As my right hon. Friend Dame Margaret Hodge recently calculated, Facebook’s corporation tax bill represents just 0.62% of its revenue here, as it pays £7.4 million in corporation tax on sales of £1.3 billion.

We are pleased that the Government have found the time to tidy up the statute book by implementing the measure before us today. Surely, the Minister must agree that there still appears to be one rule for big companies, such as Facebook, and another for everybody else. Rather than arguments about things such as the tax gap, which addresses things such as how much cash-in-hand has been paid for trade in services, this imbalance is what the public really want to see addressed. If there is one thing that the whole Committee might agree on, it is that we all welcome innovation and technology, and all the benefits they bring. However, part of what makes this country so lucrative for these big companies is our infrastructure, our legal system, our transport connections and our businesses, which want to be able to advertise on these platforms. It is not unreasonable for the likes of Facebook to contribute to that, just as every other business does.

The clause is clearly more modest than that, being, as I said, just a tweak to the 2017 legislation. It would have been infinitely preferable to get this right first time. The explanatory note sets out in detail the consultation process that was undertaken in relation to this legislation between 2015 and 2016. That seems to have discussed issues related to domestic implementation and, we must remember, will have been carried out at a cost to Her Majesty’s Treasury and, therefore, the taxpayer. Again I have to ask, what fell short in that process, so that we are discovering these defects in the Bill only one year later? Could the Minister provide some further insight on the further engagement with affected businesses that is mentioned in the explanatory notes?

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

The answer to the hon. Gentleman’s understandable question as to why we have to revisit this matter in this Finance Bill is similar to that which I gave in the context of the last clause—the complexity and the volume of the legislation. We published the draft legislation originally, so that it could be considered. I think it is right that we are now coming forward to make the necessary changes at this time. The hon. Gentleman mentioned his aspirations that the corporate interest restriction would bite and be effective. For that, I am sure he has looked at the amount that is scored for this particular measure—it is one of the more significant anti-avoidance measures that we have come forward with in recent times.

The hon. Gentleman also commented on the tax gap and sought, perhaps, to characterise the tax gap as being all about—I think he used the expression—cash-in-hand dealings, so as to suggest that it was not also about ensuring that large companies pay their fair share of tax. I assure him that we are constantly looking at larger businesses. The tax gap is disaggregated in a way that shows that. I reassure him that of the largest roughly 200 or 210 companies in the United Kingdom, about 50% are under active investigation at any one time. That does not mean in any way that any of them have done anything wrong, but that we do look at larger companies very carefully.

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

I was simply trying to make the point that the tax gap is a series of estimates by HMRC as to avoidance in different areas—yes, for large companies as well as small. Surely, what the public really want action on—the Chancellor himself referenced this in his Budget speech—is the impact of very large technology companies internally charging vast amounts for intellectual property transactions within their groups and not reflecting their economic activity in a country the size of the UK.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General 3:15 pm, 29th November 2018

The hon. Gentleman makes an important point. I thank him for clarifying his comments on the tax gap. He asserts that the public expect us to take tax avoidance by large companies seriously. I assure him that that is exactly what the Government are doing. We have introduced more than 100 measures relating to avoidance, evasion and non-compliance since 2010. We have brought in and protected around £200 billion in that period. Of course, in this Committee we have debated at length both the diverted profits tax, which is bringing in more than originally anticipated and is aimed at exactly the businesses to which he refers, and the digital services tax. We are even changing the way in which the tax regime operates in order to ensure that we get a fair level of tax from those companies, whether they are the smallest businesses in the land or the largest.

Question put and agreed to.

Clause 27 accordingly ordered to stand part of the Bill.

Schedule 10 agreed to.

Clause 28