DRAFT ALTERNATIVE FINANCE (INCOME TAX, CAPITAL GAINS TAX AND CORPORATION TAX) ORDER 2022
(Limited Text - Ministerial Extracts only)
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Alternative Finance (Income Tax, Capital Gains Tax and Corporation Tax) Order 2022.
May I say what a pleasure it is to serve under your chairmanship, Sir Edward? The draft order before the Committee widens the scope of the alternative finance arrangements provisions so that certain alternative finance arrangements can receive equal tax treatment to conventional arrangements of the same kind. The United Kingdom has established itself as a leading centre for Islamic finance, and the Government took steps to further build on this last year when we issued our second sukuk, the Islamic equivalent of a bond, at more than double the size of the first. The development of Islamic finance products in the United Kingdom is a welcome sign and demonstrates our position as a world leader in this regard.
It is important that our tax rules are reviewed and updated to reflect market developments and ensure a level playing field for alternative and conventional finance products. We already have alternative finance tax provisions that set out rules on the tax treatment of Sharia-compliant financial arrangements, which allow finance to be provided without payment of interest. The provisions allow for returns made by the finance provider to be treated as if they were interest for tax purposes when certain conditions have been met. However, home purchase plans provided by firms that do not fall within the existing statutory definition of a financial institution, and alternative finance arrangements facilitated by peer-to-peer platforms, are not currently within scope of the provisions. Home purchase plans are a Sharia-compliant method of obtaining property finance in a way that ensures no interest is charged. Currently, Financial Conduct Authority-regulated providers of such products are not defined as financial institutions, and their customers are not able to access the alternative finance rules. They therefore face less favourable tax treatment for the purposes of income tax, capital gains tax and corporation tax than providers that are already defined as financial institutions.
Lenders and borrowers entering certain finance arrangements through Sharia-compliant peer-to-peer platforms also face less favourable tax treatment, which means that home purchase plans provided by FCA-regulated providers, and certain alternative finance arrangements facilitated by an FCA-regulated peer-to-peer platform, are on an unequal tax footing with similar products provided by financial institutions and conventional peer-to-peer lending. The changes made by the draft order will allow both of those types of firms to access the alternative finance arrangements provisions for the purposes of income tax, capital gains tax and corporation tax.
Amending the rules to allow home purchase plans from FCA-regulated providers to fall within the alternative finance provisions will bring parity between conventional financial institutions and non-bank providers, and bringing Sharia-compliant peer-to-peer arrangements within the scope of the rules will encourage investors and operators to enter the Islamic finance market, allowing the Islamic community, especially small businesses, to benefit. It will also contribute towards offering a level playing field for Islamic finance and conventional finance.
When consulting on the draft order, further issues arising from the developing market have been brought to the attention of the Government. They relate to stamp duty land tax rules for Sharia-compliant peer-to-peer lending, and to the individual savings account regulations that may exclude certain arrangements from innovative finance ISAs. I am always grateful to those who bring such matters to the Government’s attention, and those points are being assessed.
These changes reflect developments within the Sharia-compliant market and will allow the industry to continue to thrive and grow, maintaining the UK’s position as a global hub for Islamic finance. I hope colleagues will join me in supporting this order, and I commend it to the Committee.
John Glen
I very much welcome the support of the hon. Members for Hampstead and Kilburn and for Glenrothes. They raised three issues: the treatment of ISAs, student loans—notwithstanding your injunction not to address that point too explicitly, Sir Edward, I will refer to it briefly—and stamp duty land tax with respect to fintech.
First, I pay tribute to the hon. Member for Bradford West, who engaged with the consultation as chair of the all-party parliamentary group on Islamic finance. She was very supportive of this order and the changes. There were respondents to the consultation who requested an extension to the stamp duty land tax exemptions for regulated entities in the Islamic fintech industry, such as peer-to-peer platforms. Officials did not consider it feasible to implement those changes in this statutory instrument, and they and I are exploring the issue further through alternative means.
The Government want to ensure that higher education remains accessible to those with the desire and ability to benefit from it. We are currently considering whether alternative student finance could be delivered as we take forward the lifelong loan entitlement. The consultation on the detail and scope of the LLE closed on Friday 6 May, and the Government are currently considering the responses. A further update on alternative student finance will be provided when the Government issue their response to the LLE consultation.
I think that I have mentioned the non-inclusion of the stamp duty land tax. The issue of ISAs, which was raised by the hon. Member for Glenrothes, has also been brought to the attention of my officials. It is likely that the ISA regulations will require some minor amendments to ensure that alternative finance arrangements can qualify for inclusion in innovative finance ISAs. The changes required will be included in the forthcoming technical changes to the ISA regulations. I think that deals with the substantive points that have been raised. As I said, I welcome Opposition Members’ support.
This alternative finance order will enable home purchase plans provided by regulated firms that do not fall within the existing statutory definition of that financial institution, and alternative finance arrangements facilitated by regulated peer-to-peer platforms, to receive equal tax treatment for the purposes of income tax, capital gains tax and corporation tax. I sincerely believe that this order will help to level the playing field for those products and will aid the Islamic finance industry to move forward in the UK, and continue to develop, to cement our reputation as global leaders in this area. I hope that the Committee has found this afternoon’s session informative and will now be able to support it.
Question put and agreed to.