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It has been suggested that there is something unfair about apportioning gains between the part that is attributable to a time when the conditions for the business asset treatment are satisfied and the part that is not. However, it is perfectly fair and reasonable that an asset that has not been a business asset throughout the relevant period of ownership should be treated less generously than one that has. That is the whole point of the more generous business asset taper. To compare the case of a person who acquired the asset when it was not a business asset, but was later converted to one, with a person who has held the asset throughout as a business asset is to compare apples and pears. We discussed that in Committee at considerable length.

Mr. Burnett: Does the Economic Secretary agree that the Government amendments that convert non-business

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assets to business assets are thoroughly worth while and that, if that is so, they would have been worth while two or three years ago?

Miss Johnson: Of course I agree that those changes are worth while, but we cannot incentivise past activities by backdating the measure. That is the crux of the matter, and it is the reason why hon. Members are comparing apples and pears. The apportionment is right in principle because it treats both cases alike by enabling them to receive business asset taper for the time they held the shares as a qualifying business asset. Therefore, I do not agree that the clause is in any way unfair. It is perfectly fair to give business asset taper relief to those who qualify for such relief for the time that they so qualify and not for times that they do not. That is a benefit to all those who hold, and continue to hold, business assets.

It has been argued that the amendment would simplify assessments by ending the need for apportionment. That is true up to a point, but apportionment would still be necessary if assets changed their status for another reason. The complexity of apportionment has been much exaggerated. The Inland Revenue will set out clearly the series of simple steps that taxpayers should follow.

Moreover, such a backdating amendment would be very expensive. There would be a cost of more than £300 million in the next three years. That cost would be all deadweight; it would not act as an incentive and would have no impact on future behaviour. The amendments would direct money away from the new enterprise economy, rather than provide further incentives for growth. Therefore, if the amendment is not withdrawn, I shall urge hon. Members to vote against it.

Mr. Flight: It is not our intention to press the amendment to a Division. The Economic Secretary is aware of the fact that the arrangements contain unfair anomalies and that citizens who are treated unfairly will not be happy. The problem is extremely complicated and the alternative solutions would create other difficulties. We have given the issue an airing, and the Government would be well advised to consider it further, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 67

Taper relief: assets qualifying as business assets


Amendment made: No. 97, in page 49, line 8, at end insert--
'( ) After paragraph 22 insert--
"Qualifying shareholdings in joint venture companies
23.--(1) This Schedule has effect subject to the following provisions where a company ('the investing company') has a qualifying shareholding in a joint venture company.
(2) For the purposes of this paragraph a company is a 'joint venture company' if, and only if--
(a) it is a trading company or the holding company of a trading group, and
(b) 75% or more of its ordinary share capital (in aggregate) is held by not more than five companies.
For the purposes of paragraph (b) above the shareholdings of members of a group of companies shall be treated as held by a single company.

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(3) For the purposes of this paragraph a company has a 'qualifying shareholding' in a joint venture company if--
(a) it holds more than 30% of the ordinary share capital of the joint venture company, or
(b) it is a member of a group of companies, it holds ordinary share capital of the joint venture company and the members of the group between them hold more than 30% of that share capital.
(4) For the purpose of determining whether the investing company is a trading company--
(a) any holding by it of shares in the joint venture company shall be disregarded, and
(b) it shall be treated as carrying on an appropriate proportion--
(i) of the activities of the joint venture company, or
(ii) where the joint venture company is the holding company of a trading group, of the activities of that group.
This sub-paragraph does not apply if the investing company is a holding company.
(5) For the purpose of determining whether the investing company is a holding company--
(a) any holding by it of shares in the joint venture company shall be disregarded, and
(b) it shall be treated as carrying on an appropriate proportion of the activities--
(i) of the joint venture company, or
(ii) where the joint venture company is the holding company of a trading group, of that group.
This sub-paragraph does not apply if the joint venture company is a 51 per cent subsidiary of the investing company.
(6) For the purpose of determining whether a group of companies is a trading group--
(a) every holding of shares in the joint venture company by a member of the group having a qualifying shareholding in that company shall be disregarded, and
(b) each member of the group having such a qualifying shareholding shall be treated as carrying on an appropriate proportion of the activities--
(i) of the joint venture company, or
(ii) where the joint venture company is the holding company of a trading group, of that group.
This sub-paragraph does not apply if the joint venture company is a member of the group.
(7) In sub-paragraphs (4)(b), (5)(b) and (6)(b) above 'an appropriate proportion' means a proportion corresponding to the percentage of the ordinary share capital of the joint venture company held by the investing company or, as the case may be, by the group member concerned.
(8) The following shall be treated as having a relevant connection with each other--
(a) the investing company;
(b) the joint venture company;
(c) any company having a relevant connection with the investing company;
(d) any company having a relevant connection with the joint venture company by virtue of being--
(i) a 51 per cent subsidiary of that company, or
(ii) a member of the same commercial association of companies.
(9) The acquisition by the investing company of the qualifying shareholding shall not be treated as a relevant change of activity for the purposes of paragraph 11 above.
(10) For the purposes of this paragraph 'ordinary share capital' has the meaning given by section 832(1) of the Taxes Act.".'.--[Miss Melanie Johnson.]

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Schedule 22

Tonnage tax


Amendment made: No. 99, in page 432, line 32, at end insert--
'; and
(f) the profits of the overseas company out of which the distribution is paid are subject to a tax on profits (in the country of residence of the company or elsewhere, or partly in that country and partly elsewhere).'.--[Dawn Primarolo.]

Clause 92

Transfers of value by trustees linked with trustee borrowing

Mr. Flight: I beg to move amendment No. 147, in page 66, line 21, leave out "that are" and insert--


'who are not trustees of a settlement for the benefit of the persons named in paragraphs (a) and (b) of section 86 of the Inheritance Tax Act 1984 but who are'.

Mr. Deputy Speaker: With this it will be convenient to discuss the following amendments: No. 148, in clause 93, page 67, line 26, after "(a)", insert--


'"settlement" means any settlement other than for the benefit of the persons named in paragraphs (a) and (b) of section 86 of the Inheritance Tax Act 1984 and'.

No. 149, in clause 94, page 67, line 45, after "13", insert--


'and "settlement"means any settlement not being for the benefit of the persons named in paragraphs (a) and (b) of section 86 of the Inheritance Tax Act 1984.'.

No. 150, in page 68, line 34, leave out "that" and insert--


'which is not engaged in a trade or which does not have a 51 per cent. subsidiary (as that term is defined in section 838 of the Taxes Act 1988) which is engaged in a trade, and which'.

No. 151, in page 68, line 34, at end insert--


'(3) This section shall not apply if the trustees show in writing or otherwise to the satisfaction of the Board of Inland Revenue either
(a) that the purpose of avoiding liability to capital gains tax was not the purpose or one of the purposes for which the trustees became a participator in the close company to which the chargeable gain accrued; or
(b) that the acquisition and the disposal by the close company of the asset on which the chargeable gains accrued were bona fide commercial transactions and were not designed for the purpose of avoiding liability to capital gains tax.
(4) The jurisdiction of the Special Commissioners on any appeal shall include jurisdiction to review any relevant decision taken by the Board in exercise of their functions under subsection (3) above.'.

Mr. Flight: There was a fairly full discussion in Committee of the territory that these amendments cover. A matter of principle is ultimately involved: whether the Government's objective is fundamentally to prevent tax avoidance or to change a principle of British law. It is understood that the purpose of clauses 92 and 93 is to try to stop tax avoidance, but they are widely drafted and apply to all trusts, irrespective of their purpose and operation.

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Employee trusts frequently take out a series of loans from employing companies within a group as part of their disposal of shares to employees. The loose wording of schedule 25 could be applied, more or less, to anything to which the Inland Revenue wanted it to apply. Under amendments Nos. 147 and 148, we suggest that employee trusts should be excluded from the scope of the measure, putting beyond doubt that wider employee share ownership should not be hindered inadvertently by such ambiguously worded legislation.

The same point arises in relation to amendment No. 148. Employee trusts could make both gains and losses as they pass to employees shares that have been warehoused for a period. It is possible for them to receive shares from, for example, a retiring controlling director. They could be exposed to higher than necessary capital gains while engaged in perfectly legitimate activity, which the Government wish to encourage.

Similarly, amendment No. 149 is drafted to exclude employee trusts. Why should employee trusts be penalised because they happen to be established for United Kingdom employees where the parent company is located overseas? The Government may say that that is highly unlikely, but business is increasingly global and an employee trust could hold 5 per cent. or more of a company--the minimum threshold to receive a tax bill under clause 94. However, an employee trust would be unlikely to hold more than 5 per cent. of such a company as part of a tax avoidance scheme.

Amendment No. 150 focuses on different territory. The Paymaster General has helpfully confirmed in correspondence that the provisions under clause 94 will apply only to investment gains; it is not intended to apply to gains on tangible assets used in a trade. That relates to section 13 of the Taxation of Chargeable Gains Act 1992, but the defences in that section are not sufficient. Therefore, why have only tangible assets been included? What about software? The principle set out in the Paymaster General's letter could be best safeguarded by making it clear that those provisions will apply only to non-trading groups.

Amendment No. 151 is somewhat larger in scope, so I hope the House will excuse me if I deal with the arguments in total. Those subsidiaries of United Kingdom companies that make gains on the disposals of their assets pay tax in the appropriate location. If the proceeds are used to invest overseas, it is right that no UK capital gains tax arises. UK tax is payable when the proceeds are brought back to the UK or distributed to UK shareholders. Those general rules are overridden only where necessary to prevent avoidance.

The Government say that clause 94 is focused on avoidance, but their definition of avoidance includes any cases in which trustees are shareholders in a close company. Unless, as I have said, the intention is to change an underlying principle of tax law, that definition is too sweeping and unfair. It could significantly reduce the ability of UK-based groups to reinvest overseas and to create continuing flows of income, which would be taxable when brought back to the UK.

We have received a number of representations from taxpayers who are clearly not involved in avoidance and who will be damaged by the new rules. For example, a pension fund may want to invest in property overseas and find that it can take a stake in a non-UK company,

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the rest of which is owned by a UK private group. Under clause 94, if such overseas property were sold--that would be outside the control of the pension fund--the pension fund would be deemed to be a tax avoider and a notional gain would be charged even if the proceeds were invested overseas and thus not available.

Another example is a charity with significant assets represented by a gift of shares in a private company. If the status of the private company changed to close--which, by definition, would be outside the charity's control--the charity would have deemed gains visited on it. Thus, it would have a tax liability even when it had no taxable proceeds. A more glaring anomaly is represented by the example of a close company at present controlled by individuals who will be outside the scope of the new rules introduced by clause 94. If those individuals believe unreservedly in the values of employee share ownership, they might create a trust for the permanent benefit of their staff and transfer to it the majority of the shares in the company. Under clause 94, the situation would change totally so that the trustees would be deemed guilty of tax avoidance. Overseas gains would be attributed to them even if they had no money with which to meet the tax. The Baxi Partnership, to which we referred extensively in Committee, is an example of that.

A company that has had investments abroad for 20 or 30 years might decide that the time has come to realise those investments and reinvest the proceeds in either a different asset or another overseas country. Again, there would clearly be no UK tax avoidance motive, but if the company committed the heinous crime of having trustee shareholders, deemed gains would be attributable through to those shareholders if the company was close and the funds available for reinvestment would be reduced.

In Committee, we urged the Government to accept that they had to identify commercial cases, including such examples as I have described, to meet what we understood to be their intention to focus on avoidance situations. Our amendment, which draws on long-standing precedents, offers an acceptable way to achieve that. One of the oldest anti-avoidance provisions in our tax code was originally section 18 of the Finance Act 1936, which became well known through the Vestey case in the 1980s. Even that provision, the severity and breadth of which has been commented on by a number of distinguished judges, provides an exemption when the taxpayer has invested overseas for bona fide commercial reasons or not to avoid UK tax. In the narrow area on which the Government are focusing, we ask that they afford the same protection that extends to that wide income tax avoidance provision.

To sum up, a recent Revenue technical note said:


We ask the Government to see that justice is done.


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