Finance Bill

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Mr. Michael Jack (Fylde): I ask this out of a genuine wish for information. The Economic Secretary is arguing that the proposal in the substantive clause should be accepted instead of the amendment of my hon. Friend the Member for Arundel and South Downs. Are the carry-forward provisions for unused trading losses and capital losses in the substantive clause or in the amendment?

Ruth Kelly: Obviously, I have been discussing the general clause, because it is necessary to understand it in order to understand the complexity that would be introduced by the proposal of the hon. Member for Arundel and South Downs. However, the substance is clearly in the clause rather than the amendment. Amendment No. 12 would complicate the process and run counter to the way in which relief is given for losses in other contexts. Therefore, I urge the Committee not to accept the amendment.

Mr. Flight: I do not think that the Economic Secretary has answered the pertinent question raised by my right hon. Friend the Member for Fylde (Mr. Jack). To try to explain the matter in simple language, clause 47 corrects one anomaly but creates another one. In essence, a sole trading business in need of cash may be forced to surrender valuable tax losses for the future in order to save on the capital gains tax in the year in question. The Government are not happy with our amendment. Although the issue is specific, I cannot believe that the clause accords with

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Government policy, which is supposed to be about endeavouring to help small new businesses. The Chartered Institute of Taxation suggested that the implementation of the rule in clause 47 might be put back a year or two and that the treatment should be available by election, so that the individual can choose to sit on a small loss instead of obtaining taper relief to preserve losses to carry forward.

One anomaly has been addressed but another situation has opened up. I do not think that that is the intention of the policy. The issue is quite technical, but I ask the Government to consider further the point that has been raised. On full digestion, I believe that they will agree that clause 47 is not exactly what they want.

Ruth Kelly: The change is essentially one that will reduce tax charges. People will be able to set a greater amount of trading losses against their capital gains and, by doing so, generally reduce the charge to tax. If it is helpful to the Committee, the carry-forward provisions are not changed by the clause. Unused trading losses carried forward can be set against future trading profits. I do not think that the concerns of the hon. Member for Arundel and South Downs are valid.

Mr. Flight: What the Economic Secretary has just said is extremely important. For the sake of clarity, is she arguing that, if there are greater trading losses than are needed to take advantage of the taper relief, those that are not used can definitely be carried forward against future profits? Clause 47 does not quite say that. I would be interested to know how it works—not now, but in a letter perhaps. That is the exact point that we are endeavouring to get at; if it is covered, we are happy.

Ruth Kelly: I will write to the hon. Gentleman explaining the technicalities behind the interpretation of the clause. If there is anything there, we will certainly consider it.

Mr. Flight: I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 47 ordered to stand part of the Bill.

Clause 48

Election to forego roll-over relief on transfer of business

Mr. Flight: I beg to move amendment No. 65, in page 33, line 11, after 'apply', insert

    'to the full gain arising on the incorporation of the business or a proportion thereof as specified in the election'.

We have tabled the amendment to make the election apply only to part of the gain, as suggested by the Institute of Directors. The purpose is to allow people who incorporate their business and then dispose only of some of the shares in a two-year period to disapply incorporation relief on the proportion of the gain arising on the shares disposed, and not on the whole gain. The Chartered Institute of Taxation suggests a

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full review of the reliefs available on incorporation, particularly if lots of unincorporated businesses arise; we discussed earlier the issue relating to people choosing to incorporate as a result of the tax advantages of incorporation. If that happens as we anticipate, the whole territory may need more consideration.

Ruth Kelly: The amendment would introduce an unwelcome complexity to the way in which capital gains tax incorporation relief applies. First, to give a little background to the Committee, I think that it would be useful to explain incorporation relief.

Such relief enables the owners of an unincorporated business to transfer it to a company as a going concern without facing an immediate capital gains tax charge on the disposal of the assets transferred. The relief prevents capital gains tax acting as a disincentive for a growing business to incorporate. It works by rolling over the gains on the assets of the business into the shares acquired in the company. The gain comes into charge when the shares are eventually disposed of.

Incorporation relief does not always work to the taxpayer's advantage because any capital gains tax taper relief that has accrued on the transferred assets will not be inherited by the shares. That means that, if the shares are disposed of two years after the transfer, the business owner might have been better off if he or she had not received the benefit of incorporation relief.

The clause deals with that concern. It will allow the business owner to opt out of incorporation relief after the event, and incur the capital gains tax charge on the transfer of assets to the company with the appropriate taper relief intact. The rules proposed in the clause for an election to opt out of the relief are straightforward and simple. The change will reduce tax charges in the majority of cases where shares in the company are sold within two years of the transfer.

Amendment No. 65 would introduce a special provision for cases in which only some of the shares are sold in that period. That would introduce some significant additional complications, which I fear are not addressed by the amendment. For example, it would be necessary to cater for circumstances in which more than one class of share was involved and the different classes carried different rights to the assets that had been transferred. Furthermore, rules would be needed to deal with situations in which the assets transferred did not all qualify for the same rate of taper relief.

Clause 48 introduces a modest but worthwhile change that will reduce some of the stress of the incorporation decision. We are introducing it in response to specific representations that we have received. I am not attracted to the idea that we could tinker with it in order to deal with the points made by the hon. Member for Arundel and South Downs. The amendment would introduce additional significant complexity, and it is not clear how people would benefit from it.

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Mr. Flight: For simplification, I think that the Minister is saying that the Government do not agree in principle that it should be possible to make the election in respect of a proportion of a business corresponding to which shares are disposed of within two years of incorporation and to receive incorporation relief on the remaining part of the business. Why does she not feel that that ought to be addressed?

Ruth Kelly: This is a question not of principle but of pragmatism. Every taxpayer who made a disposal of shares soon after incorporation would, under the hon. Gentleman's proposal, feel compelled to work through every possible combination of full and partial elections to see which gave the best results. The legislation would have to be considerably expanded to cater for the different circumstances that needed to be addressed by a partial election.

I do not dispute the fact that the amendment would benefit some people. However, I do not believe that it would be worth while to include the amendment because of the additional complexity that it would introduce, which would be to the disadvantage of the majority of owners who incorporate their businesses. What we hear from businesses is that they would like the tax system to be simpler. The proposals in clause 48 would help many people in a simple, straightforward way. It is the inherent complexity, not the principle, of the amendment that I cannot accept.

Mr. Flight: This is not a huge issue, but it is one that was raised by the Institute of Directors, so some elements of business do have concerns about it. I understand the Minister's logic and do not think that the matter is sufficiently material to put it to a vote. However, the Government might, in the interests of fairness, think about whether there is a simpler way to address the point. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That the clause stand part of the Bill.

The Chairman: With this, it will be convenient to take new clause 5—Taper relief: holding period for business assets when roll-over relief on transfer of business assets applies—

    '.—(1) After section 162(3) of the Taxation of Chargeable Gains Act 1992 (roll-over relief on the transfer of business) insert—

    ''(3A) For the purpose of computing any chargeable gain accruing on the disposal of any new asset that is eligible for taper relief under subsection (3) above the qualifying holding period for taper relief shall be deemed to have commenced on the period after 5th April 1998 when the business so transferred under subsection (1) above was held and to have ceased upon the disposal of the new asset.''.'.

Mr. Flight: In effect, our re-jigging of clause 48 by new clause 5 is in order to ensure that the taper relief clock is not stopped and then restarted under the election that is proposed in the Bill, the effect of which would be to waste the number of days during which the business was being incorporated because they were insufficient to contribute to a whole year to qualify for taper relief at the time of incorporation. If, at the time

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of incorporation, the business had been held for one year and 11 months, the 11 months would be lost if the election were made, and there would be one whole qualifying year for taper relief; that would make 50 per cent. of the gain chargeable under the taper relief provisions. However, if our re-jigging were accepted, the new shareholder would be able to sell the shares only one month after incorporating the business, and would then qualify for two complete holding years. In turn, that would mean only 25 per cent. of the gain being chargeable.

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