Finance Bill Debates

Highlights from the House of Commons debates of the Finance Bill are reported by ALLISON PLAGER.

THE FLAT RATE VAT scheme was debated in the House of Commons. The clause (23) was largely welcomed by all sides. Mark Hoban was concerned that small businesses would feel obliged to calculate their VAT on a regular basis to check whether or not they were better off using the flat rate scheme.

Commenting on this, Paul Boateng said that the rates varied from business to business and were based on information from previous VAT returns submitted by potentially eligible traders. They were intended to be 'broadly revenue neutral'. Where a business was engaged in more than one sector with the result that different rates applied, the applicable flat rate would be that for the main business sector based on turnover.

Clause 23 was ordered to stand part of the Bill.

National Insurance

Rather than increasing National Insurance in order to raise funds for the National Health Service, Edward Davey said that it would have been fairer to increase income tax. In this way, the wealthier pensioners could also have contributed, as could those on substantial unearned incomes. Largely ignoring the point of Mr Davey's comment, Dawn Primarolo replied that the Government's view was that 'people contribute while in work for the benefits and services that they need when they cannot work'.

Clause 26 was accepted into the Bill.

Territorial exclusions

The debate moved to clause 88 which relates to controlled foreign companies and territorial exclusions from section 748, Taxes Act 1988 exemptions. It gave the Treasury the power to designate territories where controlled foreign companies exemptions for United Kingdom based groups will be removed. Howard Flight put forward a 'probing amendment', as he was particularly concerned with the potential effect on British dependencies, especially Jersey. Under the clause, said Mr Flight, a United Kingdom based multi-national would face the arbitrary possibility that the exemption rules applying to controlled foreign companies, on which basis it may have structured itself, 'could suddenly change' if the Government chose to use the powers in clause 88. His amendment would provide a 'cooling off period'.

Sir Teddy Taylor questioned why the Government wished to introduce the measure which would effectively give it the power to bring in different regulations for different countries in different ways.

Dawn Primarolo responded by saying that the aim of the clause was to 'protect the United Kingdom's economic interests and tax base against harmful tax practices'. No United Kingdom dependent territory was being asked to do anything that the United Kingdom 'would not do'. Rather the aim was to create 'a level playing field'.

The amendment was withdrawn.

(Hansard, 8 May 2002, Vol 385 No 143, cols 187 to 243.)

Non resident companies

Clause 89, controlled foreign companies and treaty non-resident companies was the first clause to be discussed on 9 May. Howard Flight said that the clause would extend the controlled foreign companies régime to parent companies that emigrated from the United Kingdom after March 2002. The aim was to 'prevent abuses that could flow from the new substantial shareholders exemptions'. Non United Kingdom subsidiaries would have to show that they were controlled foreign companies and would pay United Kingdom tax if they could not satisfy the exemption requirements.

Mr Flight was concerned at how the clause would work in practice. For instance, suppose a United Kingdom resident or incorporated company moved its central management to Holland or Germany, and that it had a subsidiary in Hong Kong. The subsidiary might meet the requirements of the equivalent Dutch or German controlled foreign companies rules, but not those of the United Kingdom. The subsidiary could then be liable for tax in the United Kingdom. This was 'extraordinary', according to Mr Flight, as a German-resident company could complete United Kingdom returns in respect of a Hong Kong subsidiary.

The clause would 'treat companies that emigrate as though they are United Kingdom tax resident for ever' and Mr Flight suggested that it be amended so that it lapsed after a certain period, namely three years.

Ruth Kelly disagreed. She said that clause 89 would affect one specific type of company, i.e. one that was resident for tax purposes both in the United Kingdom and another country, but for tax treaty reasons was treated as resident outside the United Kingdom. Thus, in practice, the legislation would only operate 'in essentially contrived, inherently artificial situations in which companies are unlikely to find themselves by chance'.

Including an amendment limiting the rules to three years would help such companies, as well as those whose decisions were commercially driven. Ms Kelly said that the clearance procedures operated by the Revenue should ensure that companies were not unduly burdened by extra legislation. She emphasised that 'as long as the facts are clear' and the Revenue 'convinced that the migration is purely for commercial purposes', there would be no problem.

Mr Flight accepted the reasons for the introduction of the clause, and withdrew his amendment.

Taxpayers' rights

The House of Commons later debated Schedule 38, Recovery of taxes in other Member States. Howard Flight said that while appearing 'innocuous', the Schedule implemented European Community Council Directive 2001/44/EC. It provided an automatic enforcement in the United Kingdom of any tax claimed in another European Community country against a United Kingdom party, without that party being able to dispute the claim in the United Kingdom. The directive applied across the whole gamut of taxes, direct and indirect.

Mr Flight said that the Schedule was 'unacceptable', not least because of the differences between the United Kingdom tax system and that of other European countries. Compared with 'most European Union states', the United Kingdom tax law was clear. In other European Union countries, the law was 'often ultimately political' and could be 'extremely arbitrary'. The assumption of guilt was written in the law and a British company or citizen would have no recourse to the United Kingdom courts or Revenue. Overall, he said that Schedule 38 was 'objectionable and authoritarian, and contrary to the traditions of British civil liberty'.

Edward Davey, while saying that the 'thrust' of Schedule 38 was 'probably right', wanted to know how many other European Union states had enacted the directive, so as to ensure that the United Kingdom Exchequer was protected.

Ruth Kelly suggested that Mr Flight had 'misinterpreted' part of the provision. She said that the system would 'build on the existing inter-state debt recovery service that has operated successfully for indirect tax for many years'. The Revenue and Customs were setting up a joint unit to co-ordinate requests to and from other Member States. The applicant authority would not 'normally request recovery unless the claim, and the instrument permitting enforcement, are not contested' in the relevant Member State. She said that once an instrument permitting enforcement of a claim had been received by the Member State requested to pursue the claim, it had to be acted upon. The alternative was for the United Kingdom to review the procedures followed in other Member States to ensure that they had followed their tax law correctly, and that would be cumbersome. It would also be problematic to allow United Kingdom citizens to 'defend themselves in English in United Kingdom courts': for taxpayers to challenge other Member States' appeal systems 'through their own national courts would be to subvert national competence for tax matters'.

In essence, Ms Kelly said that the only people who needed to 'worry' about the measure were those who had not paid their tax dues.

Mr Flight remained unhappy about the Schedule, saying that there was a vast difference between VAT, which was 'administered on a fairly common basis throughout the European Union', and direct taxes. The Schedule would 'permit an injustice against United Kingdom citizens, which the British authorities would be obliged to implement, denying British companies or citizens the right to dispute the claim'.

The Schedule was, however, agreed to.

(Hansard, 9 May 2002, Vol 385, No 144, cols 321-325; 386-394.)

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