The Corporation Tax Act 2010 (Part 8C) (Amendment) Regulations 2025
(2 days, 13 hours ago)
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The Exchequer Secretary to the Treasury (Dan Tomlinson)
I beg to move,
That the Committee has considered the Corporation Tax Act 2010 (Part 8C) (Amendment) Regulations 2025 (S.I. 2025, No. 1253).
It is a pleasure to serve with you as Chair, Ms Lewell. The regulations before the Committee today amend part 8C of the Corporation Tax Act 2010. These changes are clarificatory and ensure that the legislation works as originally intended.
In the context of part 8C, restitution interest is compensation for not having had access to money awarded by the courts on repayments of tax in long-running litigation, between His Majesty’s Revenue and Customs and companies, about whether UK tax law was compatible with EU law when the UK was a member state. Many such cases remain in litigation, so more restitution interest may be awarded in the future. Part 8C was enacted to apply a higher 45% tax rate in the unusual event that the court were to award such restitution interest to companies on a compound basis—that is, including interest on the interest. It was not intended to apply to a more normal award of simple interest—that is, interest only on the principal sum. The first of the amendments to part 8C clarifies that intent by expressly removing the ambiguous meaning that it could apply in cases of simple interest, which I think we would all agree is very important.
The second amendment removes an unintended lacuna in the timing of assessment, which might otherwise mean that events overrun the ability of HMRC to raise a charge in certain cases where the courts’ decisions crystallising a charge under part 8C are outside the normal time limit. Again, we would not want that to happen.
The clarification that part 8C does not apply to simple interest is generally favourable to the companies involved, and the change to assessment time limits corrects a defect in the legislation and protects the Government’s interests in long-running disputes. In summary, the regulations ensure that the legislation applies as originally intended, and I commend them to the Committee.
Gareth Davies (Grantham and Bourne) (Con)
It is a great pleasure to see you in the Chair, Ms Lewell, and I wish a happy new year to the Minister. I thank him for setting out how the regulations will help provide legal clarity on the scope of part 8C. As he outlined, the regulations put beyond doubt that the rules do not apply to claimants who are entitled to awards of simple interest at a rate equivalent to, or lower than, a similar rate under the taxes Acts. I understand that HMRC currently applies the legislation as originally intended, which the Minister set out clearly, and that these changes simply reflect the policy as set out in part 8C. Therefore, it will not surprise the Committee that the Opposition will not oppose this measure.
Kit Malthouse (North West Hampshire) (Con)
I am hesitant to delay the Committee, but I am afraid that I have some quite serious reservations about this statutory instrument. In order that Members who may not have looked in detail at the instrument before us can understand them, it may be useful to explain a bit of the background to part 8C, which was introduced by section 38 of the Finance (No. 2) Act 2015.
The 2015 Act was snuck through in the first few months after my election as the MP for North West Hampshire, when I was still learning the tricks of the trade, and as a result I did not spot what is actually quite a pernicious part of the corporation tax landscape. So that colleagues are clear, this part of the 2015 Act says that in cases where HMRC has deducted tax unlawfully and is ordered by a court to return it, and where interest is then charged on that, because litigation may have taken years, the Revenue gets 45% of it back. It does not bear the full cost of the interest that is payable and it therefore does not bear the full economic cost of its unlawful behaviour.
I have never understood why the Revenue should get special treatment over the interest payable by any other litigant in a commercial case, particularly as these restitution cases follow unlawful behaviour by the Revenue, and the litigation has often taken over a decade to come to some kind of conclusion. While they appear and are presented as benign and clarificatory, the problem with the regulations is that what they are actually doing is embedding that unfairness and asymmetry, and giving particular advantages to HMRC in the litigation process that I am not sure are entirely warranted.
First, we have to bear in mind that the situation under the legislation at the moment is that the normal rules of corporation tax apply in terms of limits. The Revenue has to assess whether interest payable under part 8C falls within the scope of the 45% charge within four years of the end of the period in which it arises, even if the litigation has gone on for longer than that. That creates an incentive for the Revenue to act swiftly in the conduct of the legislation. The regulations give a bespoke new two-year time limit from the end of the accounting period in which the case is decided and the restitution is paid. That means that all the litigation delay risk is transferred on to the private sector company, which gives an enormous advantage to HMRC. Effectively, the regulations mean that the cost of the error by HMRC is capped, whereas the taxpayer is now exposed to prolonged uncertainty in the conduct of that litigation. Those two things together seem to entrench the asymmetry that the Revenue enjoys.
The second issue I have is around one of the principles that I hoped was embedded in tax legislation, which is that it should never be retrospective. The regulations create a retrospective charge and will apply to cases where litigation is ongoing at the moment. There are litigants at the moment who believe that the case may have run beyond the four-year time limit, and that whatever they are awarded in interest will not now be assessable. The regulations will change that rule and are effectively using a retrospective logic that means that taxpayers cannot confidently close the books on their liability or otherwise, even after prolonged litigation that may have absorbed much of their energy and time.
Those two measures seem to me to be particularly pernicious. I am interested to understand the Minister’s thinking on providing HMRC with this much more generous time limit to reach its assessment. I recognise that he is not here to justify the inherent unfairness of part 8C, but the new time limit creates the perverse incentive that HMRC can take its time. We know that since the amalgamation of the Inland Revenue and Customs and Excise, the culture of HMRC has changed significantly over the years.
When I was a trainee chartered accountant in the City, decisions on taxation were a question of two professionals sitting down together to decide what tax was actually due. The Revenue has a much more aggressive attitude towards tax collection—do not forget that this team has the ability to bust down doors without a warrant in pursuit of duty, an inheritance that it maintains from its time tackling smuggling. Those members of the Committee who are Daphne du Maurier fans will know that the excise men were well known for kicking in doors in those days—and they occasionally still do. That culture overtook, and many businesses now find themselves feeling bullied and living in fear of a call from the Revenue because of its much more aggressive approach towards tax collection, and it not necessarily collecting the tax that is properly due but collecting whatever tax it can get.
As I am sure the Minister knows, businesses will often settle with the Revenue for more than is entirely due, because they just do not want the hassle and they want it to go away. To me, that is not a proper way to run a tax system; nevertheless it happens on a daily basis. My nervousness about the regulations is that they may give the Revenue the incentive to use as much time as it can and to absorb as much energy as it can from its counterparty in litigation, to the extent that in the end the counterparty will sue for settlement, which may not necessarily be to its advantage or even be the correct amount of tax that is due.
Those are broadly my views. I understand from colleagues that they do not necessarily intend to divide the Committee, but I would be interested to hear what the Minister has to say.
Dan Tomlinson
I thank the right hon. Member for North West Hampshire for his contribution, and for sharing his knowledge and expertise on this matter and many other matters relating to tax and economic policy.
There are two separate changes. The first, as he points out, is more a clarification to ensure that this provision applies only on compound interest and not on simple interest.
Kit Malthouse
I realise that this is being painted as a concession, but as I hope that the Minister knows, in the most serious restitution cases, where unlawful behaviour by the Revenue has occurred, it is very rare that courts award simple interest. Actually, most of the awards are interest according to part 8C. Presumably, that was what was behind the original introduction of part 8C and the Revenue was saying, “Oh my God, we’ve got this massive financial exposure; what are we going to do? I tell you what: we’ll introduce a penal tax rate on this interest that doesn’t apply to anybody else.” I would caution the Minister against throwing these regulations in as some kind of concession, because in truth, in the biggest, most important, expensive and difficult cases, simple interest is very rarely awarded.
Dan Tomlinson
My understanding is that the majority of companies that are affected are likely to be awarded simple rather than compound interest, but I am sure there will be some cases—I am not privy to the individual details; as the tax Minister, that would not be appropriate—where compound interest potentially could be applied.
On the second point, the right hon. Member is raising a broader issue about why a tax rate is applied at all here, and about the incentive structures. One thing that this Government are seeking to do in the way that we oversee HMRC is to bring more focus on its delivering for taxpayers and providing value for money for us all. I now sit as the chair of the HMRC board, with an intense focus on scrutinising the work of the Department. As the Minister responsible, when cases are brought to my attention, I always ensure that HMRC is treating taxpayers fairly and proportionately.
My understanding is that when the specific change around the application of 45% interest was made back in 2015, there was a concern that without the changes made in part 8C, those payments would be taxed at the lower corporation tax rate that applied at the time the payments were due to be made, and because the payments may have accrued over many years, when the rate of corporation tax was much higher, companies receiving that interest would receive a significant financial benefit relative to the counterfactual, at the expense of the public purse. That is why the decision was made in 2015 to apply the rate of interest in such a way.
The right hon. Member raised a point about retrospection. The regulations will not apply to those businesses that have already settled and reached an agreement with HMRC, but he is right to point out the shift here—we are moving the time window to the end of the period, when a final decision has been made, rather than the start.
Kit Malthouse
Anybody who is currently in litigation with the Revenue that has passed the four-year mark from the period in which the liability may or may not have arisen would now have the expectation that if they win and an award is made, it would not be assessed under part 8C. Will the Minister confirm that now it will be assessed, so people in that situation will need to recalibrate almost completely their assumptions of risk around the litigation?
Dan Tomlinson
A very small number of companies are affected, but yes, my understanding is that this change will mean that the decision point where the interest is applied will shift from the beginning to the end. As the right hon. Gentleman says, that will change the financial considerations for the small number of businesses that are in litigation at the moment.
Question put and agreed to.