John
Healey: The hon. Lady is right to say
that maintaining a competitive economy and tax system is a continuing
challenge. She asked me about corporation tax projections, which are
set out as normal in the pre-Budget report and the Budget. It makes no
sense to strip out the corporation tax returns and projections from a
particular sector of the economy as she tried to do. I remind her that
the World Economic Forum’s most recent global competitiveness
report ranked the UK as the most competitive of all the major European
countries.
Question put and agreed
to. Clause 24
ordered to stand part of the
Bill.
Clause
25Small
companies’ rate and fraction for financial year
2006 Question
proposed, That the clause stand part ofthe
Bill.
John
Healey: The clause sets the small
companies’ rate of corporation tax for the financial year
2006-07 at 19 per cent. for companies with under £300,000
profit; it is unchanged from previous years. The clause also sets the
fraction used for calculating marginal relief on the main rate at
11/400ths, which ensures that companies with profits between
£300,000 and £1.5 million face a smoothly rising average
tax rate. That is also unchanged from the previous year. I commend the
clause to the
Committee. Question
put and agreed
to. Clause 25
ordered to stand part of the
Bill.
Clause
27Group
relief where surrendering company not resident in UK
Question proposed, That
the clause stand part ofthe
Bill.
The
Chairman: With this it will be
convenient to discuss new clause 7— Interpretation of Chapter
IV of ICTA— ‘In section
413 of ICTA, after subsection (10)
add— “(11) This
Chapter shall apply notwithstanding the terms of the European
Communities Act
1972.”.'.
John
Healey: The clause introduces schedule 1 and together,
they provide for a small extension to the group loss relief rules for
companies, which will allow UK groups to claim corporation tax relief
for foreign losses in some very limited circumstances. I put it on the
record so that it is clear that existing group relief rules for UK
losses, which business is understandably keen to retain, are unaffected
by the proposal.
The
Government are introducing this small extension to group relief
following the decision last December by the European Court of Justice
in the case of Marks & Spencer v. Halsey. In that case, the
court ruled that the UK’s group loss relief rules are in
principle compatible
with European law, but they go too far in denying relief for foreign
losses in some narrowly defined circumstances: where a UK parent
company can show that a foreign subsidiary has exhausted all
possibilities of relief in its state of residence. With effect from 1 April this
year, our domestic tax legislation will be changed by the clause to
reflect the decision taken by the European Court of Justice, making it
clear that relief will be available in some limited circumstances to a
UK parent company and its UK subsidiaries for the tax loss of a foreign
subsidiary. That foreign subsidiary must either be resident in the
European economic area or have made the loss in a permanent
establishment based in the European economic area.
Schedule 1 sets out new
conditions and rules. To ensure that they are observed the UK claimant
company will be responsible for showing that all the conditions for the
new relief are met. That is necessary because losses surrendered under
the new rules will be from foreign companies that are not generally
subject to UK law. Although the relief will be available only in the
narrow circumstances set out in the schedule, the Government became
aware that some people were planning arrangements with the aim of
obtaining relief in the UK where it would not otherwise have been
available. My right hon. Friend the Paymaster General announced on 20
February that relief in the UK would be denied where such arrangements
are made. The schedule contains provisions that will give effect to the
announcement from that
date. Mr.
Benton, you are encouraging us to debate new clause 7 at the same time
as clause and schedule stand part, so perhaps I may take briefly the
opportunity to deal with it. It is interesting that it was tabled by
the hon. Member for South-West Hertfordshire (Mr. Gauke), rather than
his party’s Front Bench spokesmen, and it will be interesting to
see what they do if he presses it to a
vote. This
is an extraordinary new clause; it could have been drafted by the
European People’s party in the European
Parliament—perhaps it was. Its intention is clearly to pretend
that the European Union does not exist and, therefore, has no impact on
the UK tax system. I explained earlier why, in our view, clause 27 and
schedule 1 are necessary and reasonable. Just as importantly, we cannot
renege on our treaty commitments in the way that the new clause
encourages and suggests that we do; it is impossible for us to do that.
Simply seeking to say that existing legislation applies notwithstanding
the European Communities Act 1972, does not set aside those
commitments, even though the hon. Gentleman may wish to do
that. On
the important central point, it is right—it is the
Government’s clear policy—that member states should have
the power to determine the shape of their own tax systems. Other treaty
provisions make it clear that that competence is preserved. We are not
endangering that power to determine our own tax policy by introducing
the clause and the schedule; we are simply aligning our law with the
latest developments in European Union jurisprudence in an area
specifically related to the internal
market. In conclusion,
clause 27 and schedule 1 make provision for a small extension to the
group relief legislation, to make it clear how relief from foreign
losses will be available in certain narrow circumstances, and enable us
to preserve existing group relief for UK losses. I commend the clause
to the
Committee. Mr.
David Gauke (South-West Hertfordshire) (Con): I am
grateful for the opportunity to speak on the clause and on new clause
7. As the Financial Secretary said, the purpose of clause 27 and
schedule 1 is to ensure that our group relief laws comply with the
European Court of Justice judgment in the Marks & Spencer case.
This is not the first occasion—nor will it be the last—on
which it is necessary for us to amend our taxation laws to comply with
ECJ judgments. I raised the significance of the impact of the ECJ on
our corporation tax law during Second Reading and I have no intention
of running through the complete history of this matter
again. It
is also worth noting that there is a widespread consensus in the UK in
opposition to tax harmonisation, particularly relating to direct
taxation. I welcome the Financial Secretary’s saying that it is
right that we determine our own tax policy. The Chancellor of the
Exchequer has stated
that “we must explicitly
reject old flawed assumptions that a single market should lead
inexorably to tax
harmonisation”. It
is sometimes tempting to think that tax harmonisation is simply about
rates, but it is not. It is broader than that; it is also about
exemptions, reliefs and thresholds. Although the Financial Secretary
states that it is right that we determine our own tax policy and this
measure is only to align group relief with regard to the latest
developments in EU jurisprudence, it cannot be considered in isolation.
Since 1996, a series of judgments by the ECJ has determined that our
tax laws have not been in compliance with European law in respect of
provisions relating to freedom of establishment under the single
market. When
this matter was debated on Second Reading, the Paymaster General was
understandably quick to point out that this is Conservative legislation
and that the various ECJ judgments are a consequence of that. However,
it is also worth pointing out that at the time of the Single European
Act there was no expectation that the various freedoms of establishment
and other freedoms set out in that Act would apply to direct taxation.
There was no explicit mention of direct taxation. All attempts at
giving EU institutions jurisdiction over direct taxation had been
rejected by member states. There was also an argument, widely accepted
until relatively recently, about the need for fiscal cohesion, and
therefore that single market provisions should not be used to strike
down national laws.
The Marks
& Spencer case determined that it was in breach of European law to
allow profits and losses made by UK residents to be offset against each
other but not to allow losses made by a subsidiary resident outside the
UK, but in the EU, to be offset against the UK group company. As a
consequence, the Finance Bill amends our law with the intention of
complying with this judgment and subsequent judgments made in the UK
courts. But as I said, this is not the first case and it will not be
the last where we are required to do this.
Consortium relief, advance
corporation tax and thin capitalisation rules have all had to be
reformed as a consequence of ECJ judgments. In addition to the
reforms of group relief being discussed today, we can expect the ECJ to
determine against the UK in respect of franked investment income, and
even since Second Reading, the Advocate-General has determined that our
rules in respect of controlled foreign companies are illegal. The cost
of these judgments to the UK Exchequer is considerable. Vast amounts of
tax have to be repaid and the estimates that I have seen suggest that
the cost to the Treasury of the Marks & Spencer case will be in the
region of £3 billion to £4 billion. I would be interested
to know what the Treasury estimates the ongoing annual cost of
implementing the provisions contained in clause 27 and schedule 1 will
be, as compared with being able to maintain the previous position, as
my new clause 7
proposes. There are
those who argue that the change to the law in these circumstances,
specifically in relation to group relief, is a good thing and that UK
companies will ultimately benefit from the reform of group relief. That
may well be the case. However, taken as a whole, I take the view that
even with this Government—I am clearly not a
supporter—the best interests of the country will be served if
decisions about our tax system are taken by the democratically elected
legislature of this country and not by a group of Luxembourg-based
judges. That
brings me to the purposes behind my newclause 7. As the
Financial Secretary has pointed out, new clause 7 amends section 413 of
the Income and Corporation Taxes Act 1988 to state that the existing
group relief rules shall continue in effect, notwithstanding the terms
of the European Communities Act 1972. It reinstates the legal position
as existed prior to the Marks & Spencer case. It sets out the law
which this Parliament determined and says that that law shall continue
to apply. It sets out the law which the Government wished to maintain
throughout the Marks & Spencer case. It will also save the Treasury
several billion
pounds. Will it be
treated as valid by the UK courts? At this point, and at the risk of
sounding like my hon. Friend the Member for Stone (Mr. Cash), I need to
turn to the Factortame case—not that there is anything wrong in
sounding like my hon. Friend. The Factortame case will be familiar at
least to the lawyers among
us. Rob
Marris (Wolverhampton, South-West) (Lab): Three of
them.
Mr.
Gauke: Not nearly enough, but we will make a start there.
In brief and to simplify, the Factortame cases related to the Merchant
Shipping Act 1988, which determined that in respect of shipping quotas,
the UK quotas would be available only for UK persons. The ECJ
determined that this was in breach of EU law. The House of Lords
determined that the terms of the European Communities Act 1972 meant
that the terms of EU treaties were to be incorporated into UK law and
existing and future Acts of Parliament are subject to EU
law. Consequently, the
Income and Corporation Taxes Act 1988, which contains the corporation
group relief provisions, is subject to the provisions of EU law, as
determined by the ECJ. The Act, in its present form, cannot stand
because it is inconsistent with EU law, as the Financial Secretary
rightly says. Consequently, the Government have considered it necessary
to modify the
law in order to comply with the views of the ECJ. However, the will of
the current democratically elected legislature is not necessary for the
case law of the ECJ to override the 1998 Act. Our role is to plug the
gap in the least damaging way possible. 11.15
am I want to
explore the alternative approach that is set out in new clause 7. It is
to state explicitly that UK law in its existing, enacted form continues
to apply, notwithstanding any contrary principle of EC law. Returning
to the Factortame cases, the essence of the judgment was the European
Communities Act 1972. It entrenched EC law by giving it the capacity to
override a later statute. The statute in question, the Merchant
Shipping Act 1988, did not purport to repeal or exclude the effect of
the European Communities Act. That gives rise to the essential question
whether a later statute may, by express words, repeal or exclude the
effect of the European Communities Act in giving effect to EC
law.
The
suggestion that the 1972 Act cannot be repealed or overridden is
surprising, even if that is Parliament’s express intention. If
that is not the case, the whole concept of parliamentary sovereignty is
thrown out of the window. Some constitutional experts have suggested
that that is the natural consequence of the Factortame decision and
that the ECJ case law is for the supremacy of EC law. Reassuringly, the
English Court of Appeal has refused to accept the argument. In Thorburn
v. Sunderland City Council, the weights and measures or metric
martyr case, Lord Justice Law
stated: “Whatever
may be the position elsewhere, the law of England disallows any such
assumption. Parliament cannot bind its successors by stipulating
against repeal, wholly or partly, of the 1972 Act. It cannot stipulate
as to the manner and form of any subsequent legislation. It cannot
stipulate against implied repeal any more than it can stipulate against
express repeal. Thus there is nothing in the 1972 Act which allows the
Court of Justice, or any other institutions of the EU, to touch or
qualify the conditions of Parliament’s legislative supremacy in
the United Kingdom. Not because the legislature chose not to allow it;
because by our law it could not allow it. That being so, the
legislative and judicial institutions of the EU cannot intrude upon
those conditions. The British Parliament has not the authority to
authorise any such thing. Being sovereign, it cannot abandon its
sovereignty. Accordingly there are no circumstances in which the
jurisprudence of the Court of Justice can elevate Community Law to a
status within the corpus of English domestic law to which it could not
aspire by any route of English law
itself.”
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