Mr. Flight: Whereas there was a logic to the argument for continuing with the complex rules over different starting dates for business and taper relief, the logic that the Paymaster General cited does not stand up in relation to the type of change that we feel it would be fair to make. The time period will have been duly rewarded during the period of employment. The only practical effect of the rules as they are would be that people would inevitably sell when they ceased to be employedand that may not even be in the interests of the company for which they have been working. At the bottom of the heap there is some decent clothing in relation to arguments about revenue. I do not see that there would be any loss of revenue, but that is not a reason to oppose the entire schedule.
Question put and agreed to.
Schedule 25 agreed to.
De-grouping charge: transitional relief
Question proposed, That the clause stand part of the Bill.
Mr. Flight: The clause covers fairly complex territory and its provisions are, in the main, welcome. I have had some difficulty in understanding the technical note about subsection (6). What are the circumstances in which a section 179 charge will arise when a company holding a previously transferred asset leaves a worldwide group less than six years after the transfer of the asset within an old UK-only capital gains tax group?
Dawn Primarolo: The clause clarifies the transitional rules[Interruption.]
The Chairman: Order. I do not mind conversations in Committee, but if hon. Members wish to speak they should move closer to each other rather than shouting across the Benches.
Dawn Primarolo: The clause clarifies the transitional rules for the de-grouping charges, including those in the Finance Act 2000. The clause is designed to ensure that there will be no de-grouping charge where, after 1 April 2000, a company holding an asset previously acquired from another member within the group prior to 2001 is transferred out of the old group but remains within the worldwide group. The de-grouping rules apply where a company leaves a group holding an asset previously acquired from another group member in the previous six years.
The transitional rules will ensure that in such circumstances, an asset transferred outside the UK group after 1 April 2000 would not trigger a de-grouping charge, provided that the asset remained within the worldwide group. The Inland Revenue subsequently received representations that on one reading of the legislationhence the changesa de-grouping charge would be unintentionally triggered in certain circumstances. The modernisation of the group chargeable gains rules was welcomed last year and the clause will ensure that no de-grouping charge will be triggered in the circumstances that I have described. It has been widely welcomed.
I think that I have covered the issue of de-grouping. If not, the hon. Gentleman might like to make his point again. He seeks the assurance, which I can give him, that the clause tidies up the issue that we promised to tidy up.
Mr. Flight: I thank the Paymaster General for that due tidying up.
Question put and agreed to.
Clause 77 ordered to stand part of the Bill.
Attribution of gains of non-resident companies
Mr. Flight: I beg to move amendment No. 36, in page 51, line 13, leave out `tenth' and insert `quarter'.
The Chairman: With this it will be convenient to take the following amendments:
No. 37, in page 51, leave out lines 16 to 22 and insert
`(b) a chargeable gain accruing on the disposal of an asset which was acquired for bona fide commercial reasons and whose acquisition or disposal does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to income tax, capital gains tax or corporation tax,'.
No. 38, in page 51, line 37, leave out `three' and insert `six'.
Mr. Flight: We return to territory that is familiar from last year's Finance Bill. At Report stage of that Bill, the Opposition thought that we had persuaded the Paymaster General to accept the reasonableness of some of our key points on the provision. The Paymaster General instituted a process of inquiry, and the measures in the clause are an endeavour to be helpful.
I wish to raise two points before addressing the amendments. First, the clause appears to apply to some important businesses that did not know about the consultation process in due time; it was over before they could have their say. Secondly, the basic point of principle is that the underlying legislation had been introduced to block a particular tax so that a certain capital gains tax avoidance scheme, which I described last year as the Belgian wheeze, could not occur. I am sure that the Government's intent is not to damage or disadvantage the bona fide commercial interests of British groups or employee trusts or charities. The amendment increases the de minimis level from 5 per cent. to 10 per cent., which is helpful, but it does not address a situation in which 60 per cent. of an overseas closed company is owned by a particular shareholder and the 10 per cent. United Kingdom shareholder has no powers. A closed company is one that is controlled by five or fewer individuals, and I assume that the Government's 10 per cent. figure was conceived as being one fifth of the 50 per cent. needed for control. However, 10 per cent. is far too low to be a significant influence; a more credible level would be 25 per cent., as in most jurisdictions the shareholder has negative control and can block special resolutions and so acquire some power of influence.
Amendment No. 37 deals with slightly different territory. The part of clause 78 to which it relates is intended to be helpful, widening the range of assets that are exempted where tangible assets, used only for the purpose of a trade outside the United Kingdom, are replaced by any asset used only for the purposes of a trade outside the UK. However, there is a problem: section 13 of the Taxation of Chargeable Gains Act 1992 is an anti-avoidance section and, as we argued last year, surely it should be expressly confined to cases of tax avoidance. The amendment is based on section 137 of the same Act, giving clearance for reconstructions or amalgamations. The form of words will be familiar in many contexts; it has been widened to cover income tax, capital gains tax or corporation tax, to mimic the words in clause 78(4). Anti-avoidance measures should be fundamentally about purpose.
The changes in clause 78 to which amendment No. 38 relates are designed to be helpful in inserting new subsection (5A) of section 13, so that when a shareholder incurs a charge on an offshore closed company he will be permitted a subsequent credit against the repatriation of the proceeds of such gains. That would give taxpayers the ability to repatriate funds to meet the tax liability, and so to avoid double taxation. The problem is that the repatriation is limited to a period within three years of the end of the accounting period in which the gain occurred, or four years from the day on which the gain itself occurred. That could result in unfairness and double taxation, because it may not be possible for some shareholders to arrange for repatriation within the three or four-year period; that harks back to the situation in which there is 60 per cent. control by another party, but the Revenue can go back six years to assess tax liabilities on taxpayers. It means that a taxpayer might be ignorant of such a liability or unable to calculate it because of genuine compliance difficulties in overseas businesses that he does not control; the time limit under new subsection (5B) could thus expire before the Inland Revenue discovered the facts and made an assessment. It would be much fairer to extend the period for credit for repatriations to shadow the period in which the Revenue can make that assessment; a six-year period should be sufficient for the United Kingdom shareholder, one way or the other, to be able to repatriate the funds from closed companies that he does not control.
Mr. Jack: I support my hon. Friend, who has given a clear and reasoned exposition. I want to discuss amendment No. 37. At the heart of the matter is the concern that closed companies might be used for tax avoidance purposes. My hon. Friend was open in referring to a possible device, but the device is visible and known about, and its purpose is understood.
My hon. Friend observed that, following last year's representations, the Inland Revenue consulted on section 13, but the consultation exercise was not distributed as widely as it should have been. One company, Grosvenor Estates, expressed interest last year, but was not directly informed about the consultation, even though it had a material interest in the substantive provision and the amendments. If that is the extent of the consultation exercise, one wonders how enthusiastic the Government were about it.
Let us focus on Grosvenor Estates, a closed company. For greater accuracy, I obtained a copy of its annual report. If one did not know that it was a closed company, one could thumb one's way through this attractively produced document and conclude that Grosvenor Estates had every characteristic of a public limited company. The company invested substantially in areas such as Liverpool, and in Preston, in my part of the world. Making profits on its capital assets at home and overseas is an essential part of its activities.
In no way could that company be described as a tax avoidance device. In common with any publicly operating company, it seeks to minimise its tax liability, but it could not be characterised as a tax avoidance vehicle especially created for that purpose. In investing in the property activities that are still the subject of this section of the tax code, such a company finds it hard to understand why it is unfairly penalised when other companies carrying out other forms of activity are relieved of having to remit capital gains tax.
During the consultation exerciseamendment No. 37 refers to itthe Revenue rejected the proposition of getting round the difficulty by having a bona fide commercial motive test. Paragraph 7 of the summary of replies to consultation states:
``The Government is not persuaded that such a test would work in this area and considers it unnecessary with the proposal that any gains on trading assets should in future be excluded from a charge under the legislation.''
Let us concentrate on the words used to justify the Government's position, as challenged by amendment No. 37.
The Paymaster General will know that motive tests apply in other parts of the tax code. If my distant memory is right, manipulations of company shares require prior approval by the Revenue under section 802such numbers were once seared into my memory, but have become a little fuzzy round the edges with the passage of time. Companies wishing to manipulate their share capital must have the specific approval of the Revenue, so in one part of the tax code there is an element of motive testand there may be others. Will the Paymaster General tell us in detailif not now, laterwhich parts of the tax code are subject to motive tests? If they are okay in one bit of the code, why are they not okay in another?
In the criminal law of this country there is always a juxtaposition between the actions of an accused person and his motives. For example, what was in the mind of a killer plays a key part in determining whether he faces a charge of murder or manslaughter. Again, there is an inconsistency in that the Treasury rejects the possibility of a proper motive test in this context, despite the fact that a motive test is an integral part of other areas of the law. I would be the first to sign up to measures to prevent people creating artificial tax vehicles for the avoidance of taxsuch as, in this context, capital gains taxbut given the entirely correct position of a company such as Grosvenor Estates, I find it hard to understand why a greater effort has not been made to resolve its problem.
I can certainly remember in my time at the Treasury seeing some quite innovative and remarkable examples of people creating artificial vehiclesbut dealing with those is part and parcel of the Inland Revenue's trade. It has a team of inspectors who can spot those things. If they can spot the ne'er-do-wells, they can spot the honest Joes. I am sad that the Government were not prepared to go the extra mile to see whether they could devise a way of sorting the wheat from the chaff and being consistent in the use of motive tests.
I sometimes find it hard to understand the distinction that is drawn. I congratulate the Government on going as far as ruling out companies that are in a legitimate trade, but that raises the interesting question as to what is illegitimate about investing in property. Let us consider the case of a closed company that is set up in north America to provide machinery, such as a service company manufacturing lifts, air conditioning equipment and the like. It could decide to go into property, and acquire some substantial property assets. It might, for example, end up with a large building, part of which could be let for normal letting purposes, with the rest being used for the wholly legitimate storage of its equipment.
If it became apparent that property was becoming a major part of the company's activity, someone in the Revenue would start asking questions. By definition there would have to be an examinationalmost a mini motive testto determine whether it qualified for the tax reliefs that are part of the substantive provision. Although that is a hypothetical example, it shows that that issue will not go away if someone takes advantage of the exemption in the principle provision, but that people who are legitimately involved in a property business are caught. Amendment No. 37 seeks to relieve them.