Mr.
Newmark: I have learned in the past year
to study not only the Bill itself, but the explanatory notes, which are
great at giving clarity. I shall read paragraph 2 of the summary of
clause 69 in the explanatory notes because it has a bearing on a point
that I shall make in a moment. As the Paymaster General said, it is
very
clear: “The
clause is based upon the principle that relief for corporate capital
losses should only be available where a group or company has suffered a
genuine commercial loss and has made a real commercial disposal of an
asset. The rule will only apply where arrangements produce a loss that
is greater than the real underlying economic loss or where arrangements
entail the asset upon which a loss is claimed to have arisen remaining
within the economic ownership of the company or the
group.” That is a fair
point, which looks clear to me.
I remain concerned, however,
when august institutions such as the Chartered Institute of Taxation
write not only to me but, I believe, the Paymaster General. I am sure
that she has seen the institute’s briefing. On clause 69, it
said: “In our
comments on the draft legislation we said that what is now clause 69
will result in the taxation of arithmetical differences that do not
correspond to actual gains. We gave the following example.
Suppose that a company has an
asset with a base cost of 100, but with a market value of 40. It sells
the asset for 40 and subsequently re-acquires it for 40. Some time
later it sells the asset to an unconnected third party for 90. The loss
on the first sale is not allowable, but the original base cost is not
reinstated. Therefore a chargeable gain of 50 arises on the second
sale, even though a real loss of 10 has been
sustained.”
Rob
Marris: Will the hon. Gentleman explain why the loss on
the first sale is not
allowable?
Mr.
Newmark: Will the hon. Gentleman clarify his question? It
was rather short and
abrupt.
Rob
Marris: The hon. Gentleman read out an example given by
the CIT: “The
loss on the first sale is not
allowable”. I am simply
asking the hon. Gentleman, who prays in aid of that example, to explain
to the Committee why the loss on the first sale is not
allowable.
Mr.
Newmark: I confess that I am not a tax
expert— [Interruption.]—but I certainly understand
the mathematics to which the institute referred. If the CIT—a
far more august institution than many to which we might
belong—has expressed a concern about the arithmetic behind the
expected impact of losses and gains in respect of this clause, I am
merely sharing that concern. I should like to ask the Paymaster
General, who has received the same document, why neither the Institute
nor I should be concerned about the issue.
Mr.
Gauke: I am afraid that I cannot throw any light on why
the loss in the first transaction will not count, but if the example
given by the CIT is incorrect because of the assumption that the hon.
Member for Wolverhampton, South-West mentioned, perhaps the Paymaster
General should confirm whether the assumption is
correct.
Mr.
Newmark: I thank my hon. Friend for that intervention,
which reflects the point that I made a couple of minutes ago. I want to
touch on the second concern raised by the CIT. It
says: “We also
mentioned that draft s184a disallows a loss arising on a degrouping
deemed disposal (eg where another person acquires more than 25 per
cent. of the chargeable company), but does not exempt any gain arising
on a similar deemed disposal. We cannot discern the rationale for this
and would appreciate an explanation. However, it seems to us to be
another case ofthe principles applying only where it suits
the Government. The above comments apply to the provisions as included
in the Finance Bill, which are the same as the draft
provisions.” Finally it
says: “It is
disappointing that there has been no change in the draft
legislation.” I am sure
that the Paymaster General has seen the document. I respect the CIT, so
I shall be interested to hear her comments on the two concerns that it
has raised in respect of clause 69.
Dawn
Primarolo: It will be more fruitful for me to write to the
CIT to explain why its concerns are not relevant than it will be for me
to answer the hon. Member for Braintree (Mr. Newmark), who has read out
what it says but is not sure how it works. I would pray in aid a number
of responses that we received as a result of publishing the draft
clauses in December, including one from Ernst and Young, which
says: “The
whole or main purpose test has been used extensively in recent
legislation”.
That is to say that people are familiar
with it. The author continues:
“I agree with the
guidance notes. Purely commercial transactions should not be caught by
this test.” That is the
case; they are not. The CIT put forward the example that we have heard.
Let me paraphrase my reply. First, this is an anti-avoidance provision.
It will catch only transactions undertaken with tax avoidance either as
their main purpose or as one of several purposes. That is a well used
concept in our tax system. The institute makes a general argument,
whereas we are talking about anti-avoidance, which already has a narrow
“target”. The principle behind the provision is that
losses will be allowed only when they are matched by a commercial
disposal. That has been made very clear, and has been acknowledged by
the accountancy press and professional bodies with regard to this
clause and the arrangements in it.
If a group
still tries to avoid tax by crystallising a loss without matching it
with a commercial disposal, it will not be surprised if it loses access
to that loss. Should it go on to pay tax on the real commercial
disposal after attempting to avoid tax, it will have to accept that
consequence. That is the response to the CIT, however it is dressed up
as company A doing this, company B doing that and some money exiting en
route. Clause 69 is
specifically targeted; it is anti-avoidance and its purpose and intent
are acknowledged to be clear. I am sure that the CIT will be grateful
to receive a slightly longer and more detailed response from me, but
those are the basic principles.
Question put and agreed
to. Clause 69
ordered to stand part of the
Bill.
Clause
70Restrictions
on companies buying losses or
gains 12.45
pm
Mr.
Goodman: I beg to move amendment No. 106, in page 57, line
10 [Vol I], at end
insert— ‘184DA Sections 8,
184A and 184B: meaning of “main
purpose” For the
purposes of sections 8, 184A and 184B “main purpose”
means a purpose without which the underlying commercial transaction
would not have
occurred.'.
The
Chairman: With this it will be convenient to discuss the
following amendments: No. 107, in page 60, line 4 [Vol I], at end
insert— ‘(4A) At the end of
section 176,
add— “(10) This
section shall not apply to companies for disposals accruing after 5th
December
2005.”'. No.
108, in page 60, line 6 [Vol I], leave out from ‘212)' to end of
line 13 and add ‘subsections (8H)
and (8I) shall cease to have
effect.'. No.
109, in page 60 [Vol I], leave out lines 25 to
28. No. 110, in page
60, line 29 [Vol I], leave out from beginning to end of line 2 on page
61.
Mr.
Goodman: The clause bundles together a series of
anti-avoidance proposals in order to amend the Taxation and Chargeable
Gains Act 1992. Before I go through
the amendments in detail, I want to return to the point about the
clarity of the legislation. In the debate on the amendments to clause
69, I quoted Deloitte’s general welcome for the provision.
However, it is worth noting that the firm Norton Rose recognises
greater ambiguity and difficulty for business in these arrangements
than the Paymaster General allows. It
said: “The
guidance notes state that the provisions do not apply where there is a
genuine commercial transaction that gives rise to a real commercial
loss as a result of a real commercial disposal. However, debate is
likely to continue as to the meaning of these phrases. HMRC have
rejected calls for a clearance procedure and have also rejected
requests for mitigation of this rule in circumstances where companies
seek to recognise capital losses on assets before a real commercial
disposal takes
place." The
context of amendment No. 106 is that proposed new section 184A in
clause 70 will place restrictions on companies buying other companies
with losses. New section 184B will place restrictions on companies
buying other companies with gains. The crucial section, which relates
to the previous two, is new section 184D which defines "tax advantage"
in relation to the other sections.
Amendment No. 106 is a probing
amendment, which would insert a new section 184DA in order to place in
law a definition of the main purpose of a company when that main
purpose is to avoid paying tax. There is currently no interpretation of
main purpose within UK tax statute. The definition in the amendment is
a case-law definition given as obiter dicta. In case any members of the
Committee do not know what that is, I looked it up, although not
through the medium ofMrs. Gauke, and found that obiter dicta
are the remarks of a judge which are not necessary to reaching a
decision, but are made as comments, illustrations or thoughts. The hon.
Member for Wolverhampton, South-West knew that already, but other
Committee members did not necessarily know. Some of them might
have. Amendment
No. 107 deals with sections 176 and 177 of the 1992 Act, which disallow
capital losses where there is tax planning to generate an unreasonable
loss. Following the changes to section 8 of the 1992 Act approved in
clause 69, there is arguably no reason for section 177 to remain in
existence for corporate bodies. The amendment seeks to establish
whether the Treasury intends to duplicate a piece of legislation
unnecessarily. Amendment
No. 108 would remove the whole of clause 70(5)(a) and (b). The argument
supporting it relates again to the unnecessary duplication of
legislation and runs as follows. The measures relate to life assurance
businesses. Specific rules prevent life assurance companies from
deferring capital gains on their holdings of equities by holding them
via a captive collective investment vehicle such as a unit trust. The
rules work by deeming the assurance company to have sold all such unit
trusts at the end of each accounting period. The net amount of capital
gains or allowable losses arising from the total deemed disposals is
spread for tax purposes over seven accounting periods, including the
current one. Typically, a net loss can be carried back against spread
gains arising in the previous six
periods. Subsections
(8A) to (8I) of section 213 of the 1992 Act were introduced to deal
with an anomaly. Capital gains and losses are particular to the company
in which they arise. Therefore, if life assurance business was
transferred to a new company, provisions allowed net spread amounts not
yet taxed to transfer with the business. However, if the stock market
then plummeted, the transferee could not carry back the losses against
gains already taxed to the transferor, even though the gains and losses
arose to the same
policyholders. Subsections
(8A) to (8I) of section 213 were introduced to allow a two-year
carry-back by election where the transferor and transferee were in the
same group. Unfortunately, in the opinion of some, subsections (8H) and
(8I) were included so that the election could be reduced by the effect
of the pre-entry gain rules. It was argued that that was unnecessary,
as the rules required that the transferee did not carry on long-term
business before the transfer. Hence, gains and losses must relate to
the same policyholders.
Clause 70
seeks to introduce a new restriction following the abolition of the
pre-entry gain rules. General anti-avoidance rules now apply to the
creation of capital losses, and specific anti-avoidance rules apply to
the purchase and sale of companies for their capital losses or gains.
Also, rules exist to prevent shareholders from using their losses
against policyholder gains and vice versa. It is argued that given
those measures, there is no need for subsections (8A) to (8I) to remain
in force. Amendments
Nos. 109 and 110 propose to delete everything between line 25 of page
60 to the end of line 1 of page 61. It is argued that the measures that
would be deleted are retrospective, and that UK tax law should not
usually be retrospective. I look forward to the Paymaster
General’s response on those
points.
Dawn
Primarolo: As with the measures in clause 69 that we
discussed, this clause will apply only to companies that enter into
arrangements with one of the main purposes being to obtain a tax
advantage. It will provide protection against the practice of buying
and selling companies not for their inherent business worth or for
access to their assets but for access to their tax potential. It also
introduces new rules to tackle tax avoidance and repeals the original
gain buying
rules. There
has been increasing evidence in recent years of tax avoidance involving
capital losses and capital gain buying, as a number of groups of
companies have accumulated large amounts of capital losses—more
than they need to set against their gains. Some of those groups have
been seeking ways to create a value for those losses. The clause will
prevent companies from benefiting from the losses of other companies or
groups when entering into an arrangement one of the main purposes of
which is to obtain a tax advantage. If the conditions set out are met,
the use of losses will be restricted so that the company or group is
stopped from setting off another group’s losses against its own
gains. Amendment No.
106 defines in fairly narrow terms what arrangements should be regarded
as having a “main purpose” of avoiding tax. There are
many examples of the main purpose test in UK tax avoidance legislation,
and by necessity the matter can be determined only on a case-by-case
basis with reference to the facts and circumstances of the taxpayer
concerned. The test is well used, and HMRC has issued detailed
guidance, which it continues to update, to provide as much certainty as
possible to business. The system is working. The main purpose test is
included
not only in clauses 69 to 71 but in a lot of other places. The phrase is
well understood by business and its advisers, and guidance and support
is given by HMRC.
The definition in
the amendment is much narrower than the natural meaning of “main
purpose” or “one of the main purposes”. The
amendment would mean that no transaction with a commercial purpose
could form part of a tax avoidance arrangement, however minor or
irrelevant it was to that arrangement. Unless the tax advantage was the
only purpose of the transaction, the rules could therefore not take
effect. Planners would simply ensure that some connection was made,
however tiny. The amendment would severely weaken the clause and mean
that companies could easily undermine the application of the
rules.
On amendment No. 107, I cannot
quite see the link between clause 70 and section 176 of the 1992 Act.
The latter deals with the calculation of capital gains and losses on
the sale of company shares when sales or transfers of assets under
value have reduced the value of the company: that is called a
depreciatory transaction. The hon. Gentleman wants to repeal section
176, which covers some common ground with, for example, clause 69. It
can be used to combat avoidance involving the artificial creation of
losses. Its remit, however, is wider than just
anti-avoidance. It
being One o’clock, The Chairman
adjourned the Committee without Question put, pursuant to the Standing
Order. Adjourned
till this day at half-past Four
o’clock.
| 
