Finance Bill

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Mr. Burnett: Will the Paymaster General give way?

Dawn Primarolo: If I could just finish that point, I might be able to answer the hon. Gentleman's question on the ECJ ruling in the French case. [Interruption.]

The Chairman: Order. The right hon. Lady must be heard.

Dawn Primarolo: Thank you, Sir. John.

The fair value rule does not create a new tax charge. It simply requires that one recognised method of accounting, fair value, is used in place of another recognised method, accruals, when a corporation tax computation must be made. It ensures that UK companies are properly taxed on the full profits they have made while they are in the UK on loan relationships and derivative contracts. To do otherwise would be to give them an unfair advantage over other UK incorporated companies. That is very clear, and hon. Members should keep that in mind.

The hon. Member for Arundel and South Downs referred to several countries, including Germany. Germany has been asked to amend its exit charge on individuals, not companies. The issue that we are debating is whether deferred taxes are paid before a company leaves the UK.

Before I give way to the hon. Member for Torridge and West Devon (Mr. Burnett), I wish to address the question about the Law Society, companies that are targeted for avoidance and the motive test. The motive test simply is not appropriate for a measure that is intended for general application. The Government do not accept that the ECJ decision in the French case applies to the legislation proposed in the clause and schedule. The measure provides a clear rule on the computation of profits for a company's final accounting period prior to its ceasing to be resident in the UK. The use of fair value, which is a recognised accounting method, is the most suitable for that.

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I shall give way to the hon. Gentleman, but perhaps he could explain to the Committee why he thinks it fair that companies should be allowed to leave the UK without having paid deferred tax. If he does not think that that is fair, why is he opposing the proposals in the schedule?

Hon. Members: Go on.

Mr. Burnett: I will not be pilloried in this way. The Paymaster General is traducing me. I was making a constructive suggestion, because I thought that she was in error. I am not yet wholly convinced that her explanation is adequate to overcome the problems that have been identified by the Opposition. I have a simple question for clarification. She said that the charge will apply only to deferred gains. Does she mean by that gains formerly rolled over, or does she mean all gains on all assets?

Dawn Primarolo: The fair value method will ensure that the company concerned pays the corporation tax due in the UK on the gains at that date. Every other corporate body in the UK is expected to do that, subject to corporation tax rules. The spectre raised by the hon. Gentleman is that in some way the ECJ ruling in the French case is pertinent to the schedule. I have explained to him that it is not. The schedule applies not to individuals but to companies. It is about ensuring that they pay the tax that they owe to the UK.

10.15 am

Mr. Burnett: Companies can roll over for capital gains tax purposes. I hope that the Paymaster General can enlighten the Committee on that important point.

Dawn Primarolo: I think that I made it clear that the UK does not accept that the judgment in that case applies to these provisions and that it would be unfair if companies were able to use migration just to extinguish deferred tax liabilities. Some of those may have arisen when a loan relationship or derivative contract was owned by another group member, which created unfairness compared with other taxpayers. The new measure provides a clear rule for the computation of profits for the final accounting period of a company prior to its ceasing to be resident in the UK. Using fair value—a recognised accounting method—is the most suitable way to do that.

The proposition that the hon. Members for Torridge and West Devon and for Arundel and South Downs made in their contributions was that they do not believe that we achieve that objective because of the ECJ decision in the French case. I have explained—so I presume that they accept the underlying principle—why the suggestion that the ECJ case is relevant is not true and why the proposals are entirely fair.

Mr. Flight: I could not agree more with what the Paymaster General said from the point of view of a British person. I think that it is debatable whether the fact that Lasteyrie applied to an individual and not to companies rules out its relevance, because it seems to me that a judgment of principle was made.

The point that the Paymaster General is not answering is this: if the issue is considered from the

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perspective of the ECJ, the problem is that the ECJ does not regard transferring to another EU base as migrating. Its attack is that anything that creates fiscal penalties merely because of migration within the EU, which it regards as one country for the purposes of tax, has to be wrong. If the Government do not accept that Lasteyrie, or the next judgment, means that the ECJ is going to attack that principle, they are naive. It is about time that the Government considered other tactics to deal with the ECJ attacks on the British corporate tax base.

Dawn Primarolo: In earlier debates, the hon. Gentleman raised the spectre of the ECJ, saying that its decisions could impinge on the UK corporate tax system. What I am saying to him is that the view of the Government—regardless of whether he thinks that it is a debatable view—is that the case that he cites is not relevant in those circumstances for the reasons that I have given.

I return to the major point. The proposals ensure that the full amount of commercial profit is taxed and that the full amount of any commercial loss is recognised in the accounting period prior to the company going offshore. That is interesting. We can discuss the views of various members of the Committee about whether the ECJ decision in the French case will impinge on it, but the advice that the Department has given me is very clear. I have explained the principles. I understand the concerns that the Law Society and others have expressed, but again I assert that the issues that have been raised are not relevant.

Mr. Jack: Given that there are similarities in corporate taxation in the United Kingdom and other member states, does the same general rule apply to companies from Germany or France, for example, that cease trading in their respective countries and come in the opposite direction? The implication is that such a company would have to pay its corporate taxes before moving here.

Dawn Primarolo: In answer to the question from the hon. Member for Arundel and South Downs and with regard to what the European Court of Justice asked Germany to do as a result of the judgment, it is interesting that Germany has been asked to amend its exit charge on individuals, not on companies. That reinforces the very point that I am making.

We have had an interesting debate. I hope both that I have made clear the advice of the Government and the principles that we are pursuing, and that the hon. Gentleman will withdraw the amendment. However, if he presses it to a vote, I will ask the Committee to oppose it.

Mr. Flight: I hope that the Minister is right, because I am perhaps even keener than she is to protect UK tax revenues, which we look forward to managing in the near future. She made a clear case as to why the Government's view is that they may escape the judgment of the de Lasteyrie case, and I hope that she is correct.

As I said, the intention behind the amendment was to probe the Government, which is quite the reverse of wishing to attack the measures. However, I remain deeply concerned that, if not Lasteyrie, there will be

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something else sooner or later. It is time for British Governments to develop a somewhat wider strategy on the issue, or we shall keep finding one attack here and another attack there, and various aspects of corporate tax revenue will be under threat. We have had a focused discussion, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 8 agreed to.

Clause 49

Derivative contracts: miscellaneous amendments

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

Mr. Flight: Briefly, following the point that we have just discussed about derivative contracts, the clause also makes provision for a slight change to the calculation of the profits and losses of an open-ended investment company, otherwise known as an OEIC.

As things stand, capital profits and losses arising from a derivative contract during a period are taxed. Those capital profits and losses are picked up from the statement of total return, which, in turn, was included in the OEIC's accounts for the year under the statement of recommended practice that the Financial Services Authority issued in 2000. The offending provision referred to any amendment brought to the statement by the FSA. As I understand it, the FSA did not issue the update; rather the Investment Management Association did so. The words issued by the FSA have therefore been removed.

The clause and schedule 8 amend rules on derivatives entered into for an unallowable purpose, which were introduced under the Finance Act 2002. The changes are intended to make the rules work as they were originally supposed to, so that much of the debits and credits arising on the contract from unallowable contracts are taken out of the profits and losses that are taxed under the rules. If the debits referable to the unallowable purposes are higher than the credits, they can be carried forward and offset against credits in future periods. Previously, the net debits could be offset directly against the credits, but that has been changed to ensure that the net debits may be offset against credits only after other allowable debits have been offset. That technical change clarifies how the rules work. It should have been included in the previous legislation, so it is both necessary and welcome.

Question put and agreed to.

Clause 49 ordered to stand part of the Bill.

Schedule 9 agreed to.

Clause 50 ordered to stand part of the Bill.

 

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Prepared 13 May 2004