§ Motion made, and Question proposed, That the Clause stand part of the Bill.
§ Mr. Mitchison
This again is a case where a little explanation might usefully be made. I put the situation as I see it to the Economic Secretary, if he is to reply.
This is a Clause to exempt certain income of pension funds for overseas employees, and, broadly speaking, the employees have to be employees of a trade or undertaking carried on abroad, but, I notice, only partly abroad, and the fund itself has to be a proper pension fund, according to subsection (2, c):recognised by the employer and employed persons in the trade or undertaking;The questions I want to put are, in the first place, in connection with:…some trade or undertaking carried on wholly or partly outside the United Kingdom;This is an exemption from tax, and, no doubt, it is for overseas employees, but does not the question whether the trade or undertaking iscarried on wholly or partly outside the United Kingdomraise some difficulty? I should like to know why it is necessary to provide for "irrevocable trusts" in connection with some trade or undertaking carried on partly outside the United Kingdom. I should have thought that that might have opened the door rather wide.
It is quite true that when we come to the next paragraph of the subsection, the benefits have to be provided:in respect of persons' employment in the trade or undertaking wholly outside the United Kingdom;What exactly does that mean? Does it mean that the persons have to be employed wholly outside the United Kingdom? Let us take, for instance, the case of a branch office of a company in some foreign country carrying on what 1469 may be taken, I suppose, to be a separate trade or undertaking. Would the pension fund be disqualified from this relief if it was used for people who made a connection, as it were, and acted as a link between that branch and the head office, and were constantly travelling to and fro?
Lastly, there is the, in my view, curious paragraph which states that the fundis recognised by the employer and employed persons in the trade or undertaking;I would have understood some reference to Revenue recognition, on the one hand, and that comes later, and I would also have understood some reference to recognition under collective arrangements of some kind, but I am a little puzzled to see what is meant byrecognised by the employer and employed persons in the trade or undertaking;bearing in mind that the trade or undertaking need only partly be carried on abroad.
I feel that my hon. Friends would be strongly inclined to sympathise with the purposes of this Clause, but I think that the application of at presents some difficulty, and I should be most grateful if one or other of the two distinguished and hon. Gentleman in front of me would elucidate the matter.
§ 7.15 p.m.
§ Mr. Barber
This Clause, as the hon. and learned Member for Kettering (Mr. Mitchison) has recognised, provides a limited tax relief for certain income arising to pension funds administered in this country which provide pensions for employees working overseas. I think that, before I come to the detailed points which the hon. and learned Gentleman made, it might be useful if I explained that at present a pensions fund in this country is liable to be taxed on its income unless it qualifies for the special relief for superannuation funds approved under Section 379 of the 1952 Act.
One of the conditions for approval is that the fund must be established in connection with some trade or undertaking carried on in the United Kingdom by a person resident in the United Kingdom. A fund administered in this country, the object of which is to provide pensions for employees working overseas for an employer overseas would, therefore, have to pay United Kingdom 1470 tax on its income. In general, pensions have tended to be provided out of funds administered in the country where the employer is resident, but circumstances may arise, particularly in relation to United Kingdom employees working abroad for concerns registered abroad, in which the employees would feel a greater sense of security if their pensions were provided out of a fund administered in the United Kingdom. In theory, this can be done under the present law, but since the fund has to pay United Kingdom Income Tax on its income, it may not be able to afford to move from the overseas territory to the United Kingdom.
The effect of the Clause will be that a superannuation fund to which it applies will be able to invest in overseas securities without attracting liability to United Kingdom tax, and also, without attracting liability to United Kingdom tax, in those British Government securities issued with the condition that the income is not liable to tax if the securities are held by non-residents. Perhaps I may mention that such a fund will be exempt from tax on dividends paid out of trading income of an overseas trade corporation.
The hon. and learned Gentleman asked me one or two questions about the Clause itself. The object of the Clause is to treat these funds in the same way as the income of non-residents are treated, and for that purpose it is necessary, as stated in subsection (2, a), that it should be:bona fide established under irrevocable trusts in connection with some trade or undertaking carried on wholly or partly outside the United Kingdom;I should have thought that it was undesirable to have put the matter in such rigid terms that the trade or undertaking had to be carried on wholly outside the United Kingdom, when, in fact, it might have some activities here which would have precluded it from the advantages of this Clause.
Certainly, so far as I know, no difficulties are likely to arise, and I have not been informed of any cases or any aspects which the Inland Revenue consider might give rise to some form of avoidance, which I think is probably what the hon. and learned Gentleman had in mind. As I have not had the opportunity of considering this matter, 1471 because this point has not been drawn to my attention before, perhaps I may be allowed to ask those advising me to look into it in the light of what the hon. and learned Member has said.
Paragraph (b) of subsection (2) provides that the Section applies to any superannuation fund which:has for its sole purpose the provision of superannuation benefits in respect of persons' employment in the trade or undertaking wholly outside the United Kingdom.We are here giving relief in respect of a superannuation fund on the basis of the reality of the situation—that is, of a non-resident taxpayer. Consequently, it is right that the person's employment in the trade or undertaking should be wholly outside the United Kingdom. The hon and learned Member will see that a little later on the same subsection reads:and for the purposes of this subsection duties performed in the United Kingdom the performance of which is merely incidental to the performance of other duties outside the United Kingdom shall be treated as performed outside the United Kingdom.In that case it would not work to the disadvantage of the employees, although it might well have done so if it were not for those saving words.
Finally, the hon. and learned Member asked me about paragraph (c). This reproduces one of the conditions for approval of a United Kingdom superannuation fund which is laid down in Section 379 of the income Tax Act, 1952. It has always been accepted that being "recognised"—which I agree is a somewhat strange word to find in an Act of Parliament—was one of the marks of a genuine occupational scheme. The fact that an employer contributes to the fund indicates that he recognises it. I am informed that for the employees the condition is not satisfied unless they have been told about the fund and about its provisions, and that before authorising relief the Inland Revenue must have evidence that that has been done.
It has been pointed out to me that that condition is a useful means of distinguishing a true occupational pensions superannuation scheme from other trusts, such as family trusts, and, although I still share the feelings of the hon. and 1472 learned Member that the word "recognised" is a little odd, it reproduces one of the conditions for approval of a United Kingdom superannuation fund which are contained in the 1952 Act and which are working satisfactorily. In those circumstances, I hope that the hon. and learned Member will not take exception to the inclusion of this provision in the Clause.
§ Mr. J. T. Price (Westhoughton)
I am sorry that I was not able to be present during the short debate that we have had, but I am interested to note that the Clause carries out the exemptions normally granted to funds in respect of people resident in this country. I believe I am right in saying that the original tax reliefs on investment revenue derived from contributions paid by employees in relation to such funds were granted as long ago as 1921 in Great Britain, under Section 32 of the Finance Act, which has been amended in many respects by subsequent financial arrangements.
Since these reliefs are now embodied in the Clause, are similar provisions to be taken as read? Where an employee has been a contributor to a pensions fund and has been granted these reliefs and subsequently relinquishes or transfers his pension rights, does he or the trustees have to repay to the Treasury tax amounting to one-quarter of the standard rate, which is the practice in this country? In the case of a company registered in Great Britain the trustees are under a liability to pay tax at one-quarter of the standard rate in respect of every employee leaving the service of that company.
Since the Clause does not contain that provision, I wonder if corresponding arrangements are made in relation to previous legislation. If that is the case it would place overseas employees in a more favourable position than employees in this country, who have to make a refund of tax of one-quarter of the standard rate then in force. Perhaps the Minister will answer that question.
§ The Temporary Chairman
That question is not in order on the Question "That the Clause stand part of the Bill."
§ Question put and agreed to.
§ Clause ordered to stand part of the Bill.