Mr.
Gauke: I am grateful to the Financial
Secretary for his kind and generous words. I fear that I will have the
worst of both worlds due to the manner in which I addressed the
Committee earlier; I presented something that might be unpopular with
some colleagues, but in such a way that I shall lose all credibility
with some of my Eurosceptic
colleagues. When
we evaluate our relationship with the European Union, it is important
to take into account both the credit and debit sides. The purpose of
new clause 7 is to highlight one of the disadvantages of our
relationship with the European Union. Our tax system is being changed
to our disadvantage, which is making it more difficult for the
Government to raise revenue through corporation tax in the way that
they would like. There is also a constitutional point about how there
has been no consent from this House that direct taxation, in
particular, should be a matter for the European Union. However, one has
to accept that there is a wider picture. There are undoubted advantages
to our membership of the European Union: anything that means that Peter
Mandelson spends most of his time abroad has got to be a good
thing.
The Chairman: Order. We
are not debating the merits or demerits of, or anything else about, the
European Common Market. We are now discussing new clause 7, and I must
ask the hon. Gentleman to return to that.
Mr.
Gauke: I merely say that new clause 7 highlights a
particular aspect. My hon. Friend the Member for Fareham fairly makes
the point that there is a larger debate, but it is not the purpose of
this Committee to debate that now. I therefore have no intention of
pressing new clause
7. Question put and
agreed
to. Clause 27
ordered to stand part of the
Bill. Schedule
1Group
relief where surrendering company not resident in the
UK
Mr.
Hoban: I beg to move amendment No. 25, in page 150, line 7
[Vol 1], leave out from ‘arrangements' to end of line
9.
The
Chairman: With this it will be convenient to discuss
amendment No. 28, in page 150, line 11 [Vol 1], leave out from
‘secure' to end of line 12 and
insert ‘that
the amount in question was not eligible for qualifying relief within
the meaning of Schedule 18A paragraphs 6, 7, or
8.'.
Mr.
Hoban: The amendments concern the specific way in which
the Government have chosen to implement the ECJ judgment, and I want to
talk about something that the Financial Secretary highlighted in the
clause stand part debate. He referred to a statement made by his right
hon. Friend the Paymaster General in February, about the Government
trying to close down any attempts made by UK companies to use the Marks
& Spencer judgment to claim group relief and to enter into what was
described as relevant arrangements to enable group relief to be
claimed.
I should like to
probe the arguments of the Financial Secretary about the clauses that
concern those arrangements. It is fair to say that if someone were
setting up a UK-based group of companies, they would seek to ensure
that the shareholdings were such that they were able to claim group
relief if losses were incurred in trading operations. They would check
that they could offset the losses in one company against the profits in
another for tax purposes. I would argue that that is a legitimate form
of tax planning from the outset. Following the Marks & Spencer
case, my belief would be that a UK parent company setting up
subsidiaries overseas would, when starting up a new operation or new
business, seek to structure the shareholdings so that they qualified
for group relief. It may be that rather than encouraging an overseas
investor to buy 30 per cent. of a subsidiary, they might ask that
investor to buy just 24 per cent., so that they could qualify for group
relief, and set up such arrangements from the outset. That is a
perfectly reasonable form of tax planning.
However, there may be
circumstances in which other arrangements are put in place, which would
enable businesses to claim group relief on losses incurred by overseas
subsidiaries. I should like to run through a few examples, to try to
tease out from the Minister where he thinks the boundary lies between
what he thinks is a sensible arrangement as part of the normal
structure of a group and arrangements that might, in his view and that
of the Treasury, be deemed to be tax avoidance. When companies are
looking at structuring their businesses overseas, they need some
certainties and some clarity.
Stephen
Hesford (Wirral, West) (Lab): With respect to the hon.
Gentleman, it seems that he wants to have his cake and eat it. If he
accepts that the Marks & Spencer judgment has to be made clear in
the Bill, how can he argue on one hand that we have to implement
it—that is, in favour of Marks & Spencer and the wider
regime for tax relief for groups of companies throughout the European
Union, which I understand is the essence of the judgment—and
also argue that it is wrong of the UK Government to narrow the proposal
as far as possible so that Marks & Spencer does not take
over-advantage of that situation? Is the hon. Gentleman in favour of
Marks & Spencer getting away with it or is he in favour of
narrowing down to the bare minimum? Which is
it? 11.45
am
Mr.
Hoban: I am in favour of proper implementation of the ECJ
judgment in the Marks & Spencer case. I will come to two issues
that are connected with that matter in the next group of amendments.
The schedule refers to relevant arrangements to enable companies to
claim group relief. Anyone setting up a group structure from scratch
and determining its structure would think about how to ensure that if
losses do arise—no company sets out to make losses—they
can flow through to UK tax computation and be offset against UK tax and
profits. That is legitimate
planning. However,
I am concerned about where the line is drawn between legitimate
planning and the actions that people might take in order to make losses
eligible for UK tax relief at a later date. There might be some tax
structuring at the start of a new business opportunity, but people may
find that the arrangements they make further on in the process,
especially their choices about changes to group structures, for
example, could make some losses eligible for relief in the UK,
depending on their actions.
To
help the hon. Gentleman, I give the example of a minority shareholder
in an overseas company in which the UK parent owns 60 per cent. and a
minority shareholder owns 40 per cent. If the minority shareholder
exercises a put option, and requires the UK parent to buy those shares,
which puts it over the 75 per cent. threshold for claiming group
relief, the arrangements have not actually been made at the behest of
the UK parent. If that happened as a consequence of actions by the
minority shareholder, those actions will act as a trigger and enable
the UK parent to claim group relief on the losses, assuming that there
is no other way of obtaining relief in the country where the overseas
subsidiary is
located. However, because it is not their action or at the
parent’s direction, they have not entered into the relevant
arrangements for the purposes of securing group
relief. We have heard
of cases in which the parent company may deliberately buy out the
minority shareholding and decide to close down the operation, and in
doing so goes over the 75 per cent. threshold, which in principle would
render those overseas losses eligible for group relief in the UK. If
that is the case and the parent actively seeks to acquire that minority
interest, does that fall within the remit of the anti-avoidance
provisions in the schedule?
We are trying to understand
what actions a company can legitimately take that will trigger group
relief which will not be picked up by the anti-avoidance claims. Is
structuring from the outset okay? Will transactions later on fall
inside or outside the anti-avoidance regulations? That is not clear, as
the wording in the schedule is quite broad. People have a legitimate
interest in understanding where the Government and HMRC will draw the
line when considering what is permissible and what is not in relation
to the structures of group
companies.
John
Healey: It is intended that the
amendments should, as the hon. Member for Fareham said, alter certain
detailed rules which would otherwise—as the clause and schedule
are drafted—prohibit relief under the schedule in some
circumstances. They would remove some of the protections in the
legislation that prevent groups of companies from entering arrangements
with a view to obtaining tax relief in the UK for foreign
losses. I
should like to deal with some of the hon. Gentleman’s questions
about the scope of our proposals. The European Court of Justice only
expects cross-border loss relief in narrow circumstances, therefore it
is important that we ensure in legislation that that is given effect
and cannot be manipulated. The judgment in the Marks & Spencer case
also makes it clear that Governments can adopt measures to prevent
companies from seeking to achieve a tax benefit in one jurisdiction
rather than another—in other words, choosing in which
jurisdiction they will obtain relief for the losses. Just to be clear,
the legislation does not prevent the movement of business activities.
Section 403G only prevents loss relief from being obtained in the UK
where a main purpose of the arrangements is to obtain group relief in
the UK. That is the central provision, which, in some senses, answers
the hon. Gentleman’s specific questions. I cannot give him a
judgment on hypothetical or individual taxpayers’ cases. The
purpose is to consider the motive in each particular case and instances
would have to be examined on a case-by-case basis. HMRC has established
procedures, with advisers and business, for doing just
that. In
summary, I am concerned because the amendments would remove some of the
important protections in the legislation. I am surprised that the
Opposition have tabled such amendments. I should be interested to hear
the hon. Gentleman say whether these are probing amendments, because he
is trying to be much more generous with UK tax. It is not possible to
be precise about the costs of the amendments, but
without the protection that they seek to remove, the potential for
abuse, which is our main concern, runs into hundreds of millions of
pounds a year. I hope
that the hon. Gentleman will not press the amendment to a Division, but
if he does, I shall ask my hon. Friends to oppose
it.
Mr.
Hoban: I am slightly disappointed with the Financial
Secretary’s response to the amendments, because people are
looking for a greater degree of clarity about what the fairly broad
paragraphs in the schedule are seeking to achieve. He referred to
assessing the motive in each case and the procedures that the Revenue
and Customs have to assess the purpose of transactions. I can see a
range of corporate transactions that people could enter
into.
Stephen
Hesford: Will the hon. Gentleman give
way?
Mr.
Hoban: I shall just finish this
point. Some of those
transactions are currently regarded as legitimate and acceptable and
others would unlock the losses for relief in the UK after a loss had
arisen and some group structuring had taken place. The Financial
Secretary is trying to capture such transactions in this anti-avoidance
provision in respect of groups that undertake restructuring to unlock
those losses for use in the UK, perhaps where there is an overseas
subsidiary with an external shareholder with more than 25 per cent. of
the shares in the company and some transactions have been entered into
that change the direction or benefit of the taxpayers. We ought really
to have some greater clarity on
that.
Stephen
Hesford: Is it not simply this? We have a judgment which
we did not want and we are seeking to narrow that judgment down to
protect the Rvenue in this country. Does he not
agree?
Mr.
Hoban: I referred to that point in my earlier remarks. We
want to see the judgment properly implemented. In doing so, we also
need to give some clarity to taxpayers on the implication of that,
particularly where actions are taken to minimise the scope for abuse
and where we are looking for greater direction and clarity from the
Government. I regret to say that I do not think that the Financial
Secretary offered that clarity in this matter.
As I said at the outset, these
are probing amendments. I will not push them to a vote but I hope that
the Financial Secretary will reflect on ways in which further guidance
can be given to taxpayers on the breadth of these anti-avoidance
techniques. Would they inhibit or catch groups that were set up as
perfectly legal and sensible business arrangements, but to which the
Revenue might impute the motive of being set up to enable group losses
to be relieved at some time in the future if a business is loss-making?
Unless the Financial Secretary has further clarification to offer, I
beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn.
Mr.
Hoban: I beg to move amendment No. 5, inpage
153, line 35 [Vol 1], leave out from ‘liability' to end of line
36.
The
Chairman: With this it will be convenient to discuss the
following amendments: No. 6, in page 153, line 38 [Vol 1], after
‘every' insert
‘reasonable'. No.
7, in page 154, line 19 [Vol 1], leave out from ‘liability' to
end of line 20. No.
8, in page 154, line 23 [Vol 1], leave
out ‘immediately after
the end of the current
period' and
insert ‘when the claim
for group relief was
made'. No. 9, in page
155, line 5 [Vol 1], leave out from ‘liability' to end of line
6.
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