Finance Bill

We believe that Government amendment 47 will be effective, and I shall explain why in a moment. As the hon. Gentleman will know, the British Property Federation and others have welcomed the amendment, which has arisen as a result of continued discussion with the industry in the post-Budget period. It makes a further change to the regime to ensure that its rules on financing costs achieve their original objectives without creating any unintended effects. Government amendment 47 will allow the charge to tax to be waived when the commissioners of Her Majesty's Revenue and Customs think that a company is in severe financial difficulties and that it could not reasonably have avoided breaching the profit-financing cost ratio owing to unexpected circumstances. That ensures that the tax charge can be waived if a REIT that has not borrowed excessively breaches the profit-financing cost ratio because of a fall in its profits and/or an increase in its financing costs that have led it into severe financial difficulties. The amendment does not seek to define "severe financial difficulties". However, in case extra clarity should be needed, it provides HMRC with a power that may be used to specify in regulations criteria to be applied by commissioners in determining whether to waive the charge. The hon. Gentleman will be aware that currently there are 21 companies in the REITs regime. We believe that that number is manageable. However, if "severe financial difficulties" needs to be defined, the powers are there. We believe, however, that the phrase is pretty broadly understood. Opposition amendment 15 would relax the requirements of the profit-financing cost ratio by bringing in credits in respect of debtor relationships and by excluding financing costs that are considered""exceptional due to their size or incidence."" However, it is not clear to the Government why the size or incidence of a financing cost should be considered to make it exceptional and why that would make it an appropriate item to exclude from the profit-financing cost ratio. We also believe that the Government amendment, by seeking to protect the ratio while ensuring that it does not lead to any unintended consequences for companies in severe financial difficulties, is a more targeted and preferred measure. Amendment 16 concerns the requirement of the REIT to distribute 90 per cent. of its profits from the property rental business to shareholders by way of a dividend. That helps to protect the investor and the Exchequer by ensuring that profits are distributed to shareholders who pay tax on them. The amendment seeks to ensure that if a company in financial difficulty fails to meet this distribution requirement it would not be treated as a "serious breach" of REITs rules. REITs legislation states that the consequences of multiple serious breaches of the rules are that REIT may be given notice by HMC to leave the regime. In the context of the distribution requirements, "serious" is not defined. However, if a company is in financial difficulties there is scope under the legislation for that to be taken into account in deciding whether to issue a termination notice. We therefore believe that there is no need for the amendment. Amendment 17 also relates to the 90 per cent. distribution requirement. Its purpose would be to allow a REIT to issue stock, instead of cash, in order to meet the 90 per cent. requirement. Allowing a REIT to issue stock, rather than cash, as part of this requirement could risk harming the investor, particularly if stock is issued to shareholders on a mandatory basis. A mandatory issue of stock as part of the distribution requirement would reduce the size of the cash dividend received by each shareholder without increasing the value of their shareholding. There would also be a risk of imposing a tax charge on shareholders that could not be covered by the cash part of the distribution. If stock is issued on an optional basis, those electing to receive cash could still see their shareholding diluted by those electing to receive stock. However, I understand the point that the hon. Gentleman makes, and I can say in response that officials will continue to meet those in the industry to discuss this issue. Amendment 18 is intended to provide REITs with an extra three years to distribute the profits from their property rental business. We cannot accept the amendment because we believe that allowing REITs an extra three years to make these distributions would harm the Exchequer and investors, many of whom have invested in REITs because of the expectation that they will receive frequent distributions. Government amendment 47 takes a targeted approach, and it has been welcomed by the property industry. We cannot accept the Opposition amendments, but we will continue to keep the regime under review and remain in dialogue with the industry on these issues.