Tax Law Rewrite Response to Paper CC/SC (08) 01 Tax arbitrage
This document is available on the internet at: http://www.hmrc.gov.uk/rewrite
1
Tax arbitrage Introduction 1. In December 2007 we published Committee Paper CC/SC (08) 01 on the HMRC internet website www.hmrc.gov.uk/rewrite. The closing date for responses was 31 March 2008. The draft clauses rewrite the legislation on tax arbitrage. 2. The purpose of this response document is to provide details of the substantive technical points made and to explain our analysis and proposals in respect of them. Minor points, such as suggestions to improve punctuation, are not covered but all comments received have been carefully considered. 3. We received written responses from the following:
• The Chartered Institute of Taxation • The Confederation of British Industry • The Institute of Chartered Accountants in England and Wales • Slaughter and May
4. The following abbreviations for tax legislation are used in this response document:
• F(No.2)A 2005 • ITTOIA • ITA
Finance (No.2) Act 2005 Income Tax (Trading and Other Income) Act 2005 Income Tax Act 2007
5. We are grateful for all the comments made, many of which were detailed, and we appreciate the time and effort that went into them. We are sending each respondent a copy of this response document.
General comments Q1 We welcome comments on the structure of the Chapter.
2
One respondent found the structure logical and clear. One respondent had reservations about much of the redrafting, on the ground that the tax arbitrage legislation was still new and users had barely had time to absorb it in its original form. This respondent considered, nevertheless, that the redrafting for the most part improved the clarity of the legislation. One respondent considered that the structure was logical and clear to new users of the legislation. 6. We acknowledge that there is a transitional issue for users of the existing legislation, but we consider that this will be outweighed by the benefits – especially for new users – of clarifying this complex and important legislation. 7. We will adopt the proposed structure for the Chapter.
Clause 2: Deduction notices Q2 We welcome comments on the proposal in clauses 2, 5, 25 and 26 to give officers of Revenue and Customs the function of giving deduction notices (Change 601). The respondents who commented on this proposal were both content with it. One of them made the proviso that this function should not be spread too thinly in future. 8. We will make Change 601 in clauses 2, 5, 25 and 26. We have drawn our specialist colleagues’ attention to the respondent’s proviso. One respondent suggested transposing clause 2(1)(a) and (b) to emphasise that the clause only applied to companies within the charge to corporation tax. 9. We will be happy to adjust the clause.
Clause 8: Shares subject to conversion One respondent commented that subsections (5) and (6) defined “the relevant time” for the purposes of subsection(1)(a) and (b) although that expression only appeared in subsection (4). 10. In subsections (5) and (6), “For the purposes of subsection (1)(a) / subsection (1)(b)…” does not actually introduce a definition of an expression used in subsection (1)(a) or subsection (1)(b). However, as the words under review have caused difficulty in this context, we will be happy to change them. 11. We will be happy to adjust the clause.
3
Clause 9: Securities subject to conversion One respondent commented that subsections (5) and (6) defined “the relevant time” for the purposes of subsection(1)(a) and (b) although that expression only appeared in subsection (4). 12. In subsections (5) and (6), “For the purposes of subsection (1)(a) / subsection (1)(b) …” does not actually introduce a definition of an expression used in subsection (1)(a) or subsection (1)(b). However, as the words under review have caused difficulty in this context, we will be happy to change them. 13. We will be happy to adjust the clause.
Clause 12: Scheme including rights of transfer under a security One respondent thought that “at that time” in clause 12(6) could be ambiguous. One respondent thought that the definition of “relevant benefits” in clause 12(7) was over-compressed. 14. We will be happy to adjust the clause.
Clause 14: The rule against double deduction One respondent thought that, on a first reading, subsection 14(1) implied that amounts were simply non-deductible. 15. The respondent appears to have incorrectly assumed, on a first reading, that “an amount is not allowable” meant that there was an amount which was not allowable. 16. We will be happy to adjust the clause.
Clause 15: Application of the rule against deduction for untaxable payments One respondent thought that “a transaction forming part of the deduction scheme, or a series of such transactions” in clause 15(2) did not rewrite section 25(6)(a) of F(No.2)A 2005 accurately. 17. We will be happy to adjust the clause.
Clause 16: Cases where payee treated as not liable as a result of scheme Q3 We welcome comments on the proposal to clarify section 25(8) of F(No.2)A 2005 (Change 646).
4
Most of the respondents supported the change in principle. However, several of them criticised the wording which had been offered to bring the change about. In particular, one respondent commented that (a) the real problem was the extent to which, in section 25(6)(c) of F(No.2)A 2005, the phrase “as a result of provision made or imposed by the scheme” applied to “the payee is not liable to tax” as well as to “his liability to tax is reduced” and (b) this problem had been solved in clause 15(4) by moving the phrase forward before the paragraphing. 18. In the light of this respondent’s comments we agree that clause 16(1)(b) is not needed. 19. We will omit clause 16(1)(b) and acknowledge Change 646 in the origin note on clause 15(4). One respondent suggested that it might be clearer to retain “of one or more person”, as in the source legislation, rather than writing “of another person”. 20. Section 6(c) of the Interpretation Act 1978 provides:
“In any Act, unless the contrary intention appears, … words in the singular include the plural and words in the plural include the singular.”
21. We propose to use the expression “of another person” for the sake of brevity. One respondent asked for the draft clauses to reflect the distinction, in international tax, between “not liable to tax” (ie in principle exempt from tax) and “not subject to tax” (ie in principle not exempt from tax, but entitled to certain exemptions). 22. ITTOIA and ITA adopted the convention that persons were “liable” to tax and income was “subject” to tax, and Bills 5 and 6 are following this convention. It is envisaged that the draft clauses on tax arbitrage will be included in Bill 7. It will be necessary to decide what drafting convention should be adopted in the draft clauses on tax arbitrage. 23. We will keep the expressions “liable to tax” and “subject to tax” under review as work on Bill 7 progresses. One respondent criticised the double negative in clause 16(1) and (2). 24. We will be happy to adjust the clause.
5
Clause 19: Receipt notices Q4 We welcome comments on the proposal in clauses 19, 22, 25 and 26 to give officers of Revenue and Customs the function of giving receipt notices (Change 601). The respondents who commented on this proposal were both content with it. One of them made the proviso that this function should not be spread too thinly in future. 25. We will make Change 601 in clauses 19, 22, 25 and 26. We have drawn our specialist colleagues’ attention to the respondent’s proviso. One respondent suggested transposing clause 19(1)(a) and (b) to emphasise that the clause only applied to UK resident companies. 26. We will be happy to adjust the clause. One respondent suggested moving clause 19(2) to clause 22. 27. We will be happy to make this adjustment.
Clause 20: The receipt scheme conditions Two respondents found clause 20(8) unclear. 28. We will be happy to adjust the clause.
Clause 21: Amounts within corporation tax One respondent thought it would be preferable not to use conditions A and B in clause 21, because of the possibility of confusion with the lettered conditions in clause 20. 29. The tax arbitrage legislation uses several sets of conditions for various purposes. To avoid ambiguity, the sets need to be distinguished and the conditions need to be separately identified. Moreover, the drafting techniques used need to leave it open for future Finance Acts to insert extra conditions if Parliament so decides. 30. We will review the drafting techniques used to identify conditions both in clause 21 and in the Chapter generally. Clause 27: Amendments, closure notices and discovery assessments where section 26 applies Two respondents noted that clause 27(7) referred incorrectly to subsection (6) instead of subsection (2).
6
31. 32.
We are grateful for this correction. We will be happy to adjust the clause.
Clause 28: Meaning of references to schemes and series of transactions One respondent commented that in departing from the wording of the source legislation clause 28(2) had changed the sense. 33. 34. On reflection, we agree. We will be happy to adjust the clause.
7