Finance Bill

[back to previous text]

Mr. Flight: I thank you, Mr. Gale, and I apologise.

Although I have not tabled an amendment on the issue, I want to mention the insurance industry's position. We have already dealt with the position of Lloyd's, and I want to deal with the major reform introduced by clause 83 and schedule 29, which provides tax relief for purchasing goodwill and other intangible assets. The insurance industry's concern is that, although insurance companies writing life assurance business are within the regime in which they purchase royalties and computer software, they are not benefiting and will not benefit from the goodwill reform. Paragraph 78(1) excludes intangible fixed assets held for the purpose of life insurance business. The reason why that is the case is a fundamental question. Surely, if a life insurance company purchases goodwill, it should be treated as any other company.

Column Number: 350

I suspect that the Government's argument for exclusion will be that the special method of taxation for life insurance companies, known as the IE system—income minus expenditure—is primarily a charge on policyholders' investments, and that goodwill relief is a matter for shareholders. It may be accepted that the new regime needs to be adapted so that it applies appropriately to the IE system, but surely goodwill held by shareholders outside the insurance companies' long-term business fund should in principle be entitled to the relief available to most other corporate taxpayers.

The Government's decision not to allow relief for goodwill purchased by insurers writing life assurance business, and held outside the long-term business fund, contrasts with their acceptance of the principle elsewhere in the Bill of the exemption from tax of capital gains on substantial shareholdings. Elsewhere, shares held by a life insurance company outside the long-term business fund qualify for relief, just as the shares of any other company would.

What is the logic on which the particularly narrow category of outside assets of the insurance industry has been excluded? Do the Government have the matter under consideration, and are they likely to include it, according to the logic of what they have done in other parts of the Bill?

10.45 am

Mr. Burnett: I should like to raise a small point of clarification with the Economic Secretary. Paragraph 56 is headed:

    ''Roll-over relief on reinvestment: application to group member''.

The Law Society has brought to my attention the fact that it is not clear from paragraph 56(2)(b) whether the disposing company still needs to be a member of the group when the expenditure on other assets is incurred. It should not be necessary for the disposing company to remain a member of the group and I look forward to hearing the Government's view on that from the Economic Secretary. If there is doubt, I hope that an appropriate amendment can be tabled on Report so that the model contained in section 175(2A) of the Taxation of Chargeable Gains Act 1992 can be followed in such circumstances. It is not wise to have the inflexibility that could be construed as being part of this provision and I hope that the Economic Secretary will give us his interpretation of the provision, and tell us whether he believes that the more benign construction is more appropriate and, if there is any doubt, that an amendment will be tabled on Report.

Chris Grayling: I want to make a brief probing point and I apologise to the Economic Secretary if he covered it in his earlier comments when I had to slip down the Corridor to a Select Committee.

The Economic Secretary will be aware that in the telecommunications and media sectors there have recently been some substantial write-downs of intangible assets following, for example, the Vodafone acquisition of Mannesmann. What would be the tax implications for substantial write-downs and future potential write-downs of 3G licences?

Column Number: 351

John Healey: Perhaps I may take those points in reverse order and deal first with that raised by the hon. Gentleman. I understand the tension between Select and Standing Committees, having experienced that myself. I refer him to the Official Report because substantial write-downs were dealt with earlier in our discussion. If he feels that I did not respond adequately to his hon. Friend the Member for Fareham, I encourage him to tackle me again.

The hon. Member for Torridge and West Devon asked about group roll-over provisions. My advice is that the rules already have the effect that he wants, so it is unnecessary for the measure to be amended.

On the specific concerns raised by the hon. Member for Arundel and South Downs about the life assurance industry, he will not be surprised to know that the Association of British Insurers has already raised the matter with the Revenue. I shall try to give an explanation of the provisions as they stand and then some encouragement and an assurance that significant consideration is being given to such matters.

The hon. Gentleman asks why a life company does not receive any relief for write-down of its goodwill under the schedule. There are two reasons. The way in which we tax life assurance companies on the income accruing for policyholders means that it would not be appropriate to allow write-down of goodwill against policyholders' income. Goodwill relates entirely to the shareholders. The ABI accepts that as a reasonable argument and I believe that the hon. Gentleman acknowledged it. As a rule, goodwill is only ever acquired by a life company for payment if there is what the schedule calls a tax-neutral transfer. That means that goodwill would never become an asset subject to the schedule.

However, the ABI believes that there may be cases in which goodwill is purchased from unconnected parties and is not held in the life company's long-term business fund, which is the point that the hon. Gentleman made. The ABI argues, as he did, that in such a case relief should be given. I am not persuaded that the case for giving relief in such circumstances is strong enough. It is certainly not right for relief of that type of goodwill to be set against policyholders' income, and the existing capital gains reliefs, like indexation and roll-over, remain available for it.

Let me also say that rules for life assurance taxation will not be static during the next few years. In the Budget, my right hon. Friend the Chancellor announced that consultation on reforms to corporation tax would start later this summer. Clearly, such reforms will include life assurance company taxation. Changes are also likely because of developments elsewhere, such as the Financial Services Authority's review of regulatory reporting requirements, which are used for tax purposes.

The hon. Gentleman asked for confirmation that the matters that he raised are under consideration. I hope that my explanation suggests that that is the case. I assure him that the treatment of goodwill will be kept fully in mind when considering any possible future changes.

Column Number: 352

Finally, as this is a clause stand part debate, I conclude by saying that I welcome the broad support of the Committee for the new provision, which puts in place a comprehensive regime that will provide consistent treatment of a company's expenditure and receipts in respect of intangible assets. The new regime replaces what I described previously as an outdated, incoherent accretion of rules based on previous judicial decisions and occasional legislation stretching back for more than 150 years. It is a significant further step in the Government's programme of corporate tax reform. The measure has been subject to extensive consultation, which has produced a better set of provisions. The end result is that the reform has been widely welcomed outside the House, and I hope that it will also be supported by the Committee.

Mr. Flight: I agree with the Economic Secretary that the reforms are broadly welcomed and again express appreciation for all the work that the Inland Revenue has done in addressing difficult issues.

On the specific insurance point that I raised, I was pleased to hear the Economic Secretary's comments. Materiality is the crucial issue. If the Government were to perceive a material aspect, they would probably see the justice of the argument. However, overall, the measures are very welcome.

Mr. Burnett: The provisions are welcome, and I am grateful for the Economic Secretary's assurance on degrouping. So that it is absolutely clear for the record, is it the Government's view and intention that it should not be necessary for the disposing company to remain a member of the group when the expenditure on other assets is incurred? That is my understanding of what the Economic Secretary said.

John Healey: That is correct.

Question put and agreed to.

Schedule 29, as amended, agreed to.

Schedule 30

Gains and losses of a company from intangible fixed assets: consequential amendments

Amendment made: No. 214, in page 442, line 26, leave out 'royalties in respect of'.—[John Healey.]

Schedule 30, as amended, agreed to.

Clause 104

Valuation of trading stock on transfer of trade

Mr. Flight: I beg to move amendment No. 185, in page 81, line 29, after 'assets', insert 'to a connected person'.

The amendment has been suggested to us by the Institute of Chartered Accountants because it feels that introducing a fiscal requirement to account for stock and work in progress on a just and reasonable basis would impose quite unrealistic obligations on parties who were actually at arm's length.

Column Number: 353

John Healey: Before discussing the amendment itself, let me explain the background to Clause 104. The clause is designed to modernise the rules governing the valuation of trading stock on the transfer of a trade. It removes existing anomalies and puts the treatment of trading stock in these circumstances on a basis that is comparable with other tax rules, including the new code for intangible asset that we have just been debating.

Under current law, trading stock that is transferred when a new owner takes over is generally—and in the circumstances that the clause is directed towards, always—brought into account in the amount of the consideration agreed between the parties. That is out of line with the capital allowances and capital gains rules. In both cases, asset values are determined by apportioning the total consideration paid for the trade on a just and reasonable basis.

That approach is not quite the same as that proposed under schedule 29 for transfers of intangible assets, but it is essentially compatible with it. Schedule 29 is founded on a just and reasonable apportionment of the consideration passing on the transfer of a business. However, it goes a step further in requiring where possible that an apportionment made in a company's accounts is to be regarded as ''just and reasonable''.

The rule for trading stock, on the other hand, is not compatible with what is proposed for intangibles or with the current rules for capital allowances and capital gains. The incompatibility of the current rules can give rise to anomalies, with businesses in some cases being taxed on amounts in excess of the total consideration paid for the trade. That is manifestly unfair. In other cases, businesses obtain more tax relief than the total amount that they have paid. That is also wrong. The new rule should put an end to these anomalies. The arrival of the new intangibles regime has made change in this area more urgent, but it is a change that is desirable in its own right. We are therefore applying that change for income tax as well as corporation tax, and regardless of whether the assets of the trade transferred include intangibles.

The purpose of the amendment is to restrict the ''just and reasonable'' rule to cases where the parties to the transfer of a business are connected persons. The Committee will not be surprised, in light of what I have said about the reasons for introducing the clause, that I cannot accept the amendment, which is both misconceived in concept and drafted in such a way that it would not achieve the purpose that the hon. Member for Arundel and South Downs is anxious to secure.

The amendment is misconceived because it would leave in place incompatible tax rules and perpetuate the anomalies to which I have referred. The existing capital allowance and capital gains rules do not limit ''just and reasonable apportionment'' to cases where the parties are connected, and I see no reason why the proposed rule for stock should do so. Those businesses that ended up being taxed on more than their total sale proceeds would not thank the hon. Gentleman.

Column Number: 354

It is hard to see why this change should impose any unreasonable obligation on taxpayers. On the contrary, it will provide for consistent treatment of the various assets bought and sold on the transfer of a trade. It will therefore make the system easier to operate and fairer. The existing capital gains and capital allowances rules, with which the clause would align the treatment of stock, have not, as far as I am aware, imposed unreasonable burdens on business. These rules have not been a prominent subject in the Budget representations made by business or specialist tax practitioners.

11 am

I do not, therefore, accept the principle behind the amendment, that the allocation of the overall sale proceeds on the transfer of a business should be capable of being overridden for tax only when the parties are connected with one another. In any event, the amendment would not have its intended effect. It would not provide for the value of trading stock to be determined on the basis of a just and reasonable apportionment in cases where a business is transferred between connected persons. That is because the transfer of trading stock in these circumstances is already subject to a different rule. In these circumstances, the value of the trading stock is the value that would have been placed on it if the stock had been transferred between independent parties acting at arm's length.

I refer the hon. Gentleman to section 100(1)(a) of the Income and Corporation Taxes Act 1988. The clause, with or without the amendment, has no impact on that special rule. The amendment, by confining the impact of the clause to situations where it has no effect, is equivalent to removing the clause from the Bill. Therefore I cannot support it, and if the hon. Gentleman decides to press it to a vote I shall ask the Committee to reject it.

Previous Contents Continue

House of Commons home page Parliament home page House of Lords home page search page enquiries ordering index

©Parliamentary copyright 2002
Prepared 13 June 2002