Mr. Davey: I am pleased that the Inland Revenue is meeting with the CBI to discuss the guidance. Will they consider possible changes to the legislation, so that we could revert to the matter on Report, possibly through Government amendments?
Ruth Kelly: I strongly believe that the consultation with the CBI and others will satisfy them that the drafting of guidance meets their concerns. We always keep in contact with the industry and it is only right that we do so. Avoidance measures change from year to year, so we return to the provisions in the natural course of events.
I believe strongly that if we provide generous relief to companies, we, as the Government and the Exchequer, have a duty to protect ourselves against schemes that are specifically set up to avoid paying tax. I urge the Committee to reject the amendment because it would provide no effective protection against the exploitation of this generous and valuable relief.
Mr. Davey: I am grateful for the Minister's long and comprehensive reply and I am sure that those who read our proceedings will find it useful as an indication of the Government's thinking. However, she quoted
Column Number: 151the Chartered Institute of Taxation's briefing and suggested that it was pleased with the Inland Revenue's approach. The same briefing stated:
There is a discrepancy. The Minister argued that the provision is narrowly drawn—
Ruth Kelly: Perhaps I can comment on what the hon. Gentleman has said. I believe that some of the concerns of the Chartered Institute of Taxation have been allayed since their briefing and following consultation with the Inland Revenue. We are developing guidance that will be translated into a clear statement of practice in due course and it will be clear that the provision is very narrowly focused and not wide ranging.
Mr. Davey: The Minister is slightly more up to date than I am in relation to briefing from the Chartered Institute of Taxation, so I shall bow to her and say that perhaps I need to talk to the institute. It is good to have that on record. This has been a useful debate and I shall talk to both the CBI and the institute. I hope that the Committee will be kept informed of how the discussions with the Inland Revenue are progressing. They seem to have been constructive. If that continues and if we have greater consensus when we come to Report, we shall have made progress. I do not wish to press the amendment. On the understanding that, if the issue is not sorted out during the consultation, we can return to it on Report, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Flight: I beg to move amendment No. 64, in page 153, line 3, leave out 'or interests in shares'.
This technical amendment was prompted by the Law Society to ensure that a shareholding is not excluded from the new exemption for substantial shareholdings if the interest in the company is held by way of instruments other than shares—for example, convertible loan stock. The point of concern is that a wholly owned subsidiary could fail the test for a substantial shareholding if it has an issue of a normal commercial loan held by another group company. If a company owned 100 per cent. of the shares in a subsidiary, which issued to the parent company a limited recourse loan of a convertible security, that security would not be treated as a normal commercial loan, and if during any period the interest on the security were equal to the amount of profits available for distribution to equity holders, the parent company would not be entitled as a holder of ordinary shares to any of the company profits available for distribution and would thus fail the test for holding a substantial shareholding in a subsidiary, although the subsidiary might be wholly owned for the purpose of group relief under the CGT grouping test. This small amendment seeks to avoid that problem, which I trust was unintentional.
Ruth Kelly: I listened with great interest to the hon. Gentleman's comments because I was eager to learn the amendment's purpose, which was not—I hope that this will not embarrass him—completely clear on first
Column Number: 152reading. By way of background, I should point out that the substantial shareholdings provisions apply not only to shares but to interests in shares. For those purposes, a company has an interest in shares if it owns them together with one or more persons. If the substantial shareholdings provisions did not include interests in shares, the disposal of an interest in shares would give rise to a chargeable gain or allowable loss. That would contrast with a gain or loss on the disposal of shares, which would be exempt, were the necessary conditions met. It would also mean that a company had a choice when disposing of shares. If such shares stood at a gain, it would be possible to dispose of them and to benefit from an exemption on their disposal. If they stood at a loss, it might be possible for a company to arrange to dispose only of an interest in them.
The amendment moved by the hon. Member for Arundel and South Downs is aimed at circumstances in which a company has a substantial shareholding in another company, which makes it a creditor of that company in respect of certain types of loan. He believes that that may cause the substantial shareholding requirement to fail. He has explained that the amendment relates to cases in which an investing company holds 10 per cent. or more of the ordinary shares in another company and is also a creditor. He suggests that in those circumstances the shares may be prevented from being a substantial shareholding because they do not provide the necessary entitlements to 10 per cent. or more of the profits and assets of the company in question. The rights that the investing company enjoys as a loan creditor may instead satisfy those entitlements. There may be something in the point raised by the Law Society, but it is difficult at this stage to know whether that is a significant and practical point, or whether it is purely theoretical.
Mr. Burnett: The Economic Secretary has made a comprehensive exposition of the problem. I wonder whether the Revenue will consider inherent rights of convertibility in loan stock, and whether those inherent rights should be taken into account when it considers the definition of ''substantial shareholding'' in that context.
Ruth Kelly: Let me deal with the point made by the hon. Member for Arundel and South Downs, and I shall come to the hon. Member for Torridge and West Devon (Mr. Burnett) in a moment.
The amendment would remove the reference to interest in shares from sub-paragraph (1), but leave unaffected the way in which it applies to shares. The hon. Member for Torridge and West Devon has suggested that we should consider another way of remedying that proposal. At this stage, I am clearly not going to commit the Government to his precise recommendations, but we shall look at what he has suggested and I shall write to him on that point. There will, of course, be other points of detail on the application of the substantial shareholdings provisions to actual cases that emerge over the coming months, and we are determined to ascertain whether there are practical problems that need to be addressed.
Mr. Burnett: I am extremely grateful to the Economic Secretary for that assurance. I should like
Column Number: 153to receive her letter in the near future because we should like to debate the matter again, perhaps on Report.
Ruth Kelly: I shall ask the Inland Revenue to consider the hon. Gentleman's proposal. If he has a point, we will respond positively to him on it, but I do not want to commit myself to accepting it today. I will provide an assurance that we will respond quickly to the hon. Gentleman's points so that the Committee can have the benefit of that letter before we return to the subject. During the coming months, the Inland Revenue will continue to consult the consultative group and others on the operation of the legislation, which will enable any practical difficulties that emerge from that process to be dealt with. If a real practical issue needs to be addressed in the light of operating experience, we can return to it.
Mr. Flight: I am glad to hear the Economic Secretary comment that if, on further consideration, the Government accept that there is a practical issue, they will look to address it. I deliberately read into the record circumstances that were not just theoretical. On the basis of what she said, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Hoban: I beg to move amendment No. 39, in page 153, line 5, leave out '10' and insert '5'.
The Chairman: With this it will be convenient to take amendment No. 40, in page 153, line 7, leave out '10' and insert '5'.
Mr. Hoban: These are probing amendments. Their purpose is to understand why the Government chose 10 per cent. as the right number for substantial shareholding. I understand that in the Netherlands, the figure is 5 per cent. In Germany, there is no de minimis limit on substantial shareholdings. We need to ensure that the corporate environment in the UK is competitive in terms of taxation, and encourages companies to invest and to realise their gains where appropriate. Many in industry are relieved that the limit is as low as 10 per cent. The consultation paper stated 30 per cent., and some people are grateful that the figure is now 10 per cent. That is not a reason for the Government to be complacent on the matter, as I am sure the Economic Secretary would expect me to say.
In what is a complex commercial environment, I wonder whether 10 per cent. is too high a limit. There is a growing number of examples of transactions, perhaps on a cross-border basis, where there are strategic shareholdings below 10 per cent. Those transactions are not cases of companies simply taking short-term positions, but part of a process of ensuring that they can play a part in developing new markets in various territories. We heard from the telecom sector that, when new mobile phone licences were issued, several overseas companies invested relatively small stakes that were strategic in intent,
Column Number: 154which formed part of their plans to develop mobile phone services internationally.
It is with those transactions and the general complexity of transactions in mind that I have tabled an amendment to query whether 10 per cent. is too high a figure. A low limit, such as 5 per cent., might be better. It is important to ensure that we maximise corporate efficiency by enabling businesses to conduct transactions for economic purposes, not simply for tax purposes. Tax should not act as a barrier to investment or divestment. The Paymaster General said on Thursday that the tax should not distort behaviour. A limit such as this may well distort behaviour. I would be grateful if the Economic Secretary would outline the Treasury's thinking on the 10 per cent. figure, notwithstanding the general welcome that industry has given to that much lower limit.
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