 House of Commons |
Session 2005 - 06 Publications on the internet Standing Committee Debates Finance (No. 2) Bill |
Finance (No. 2) Bill |
The Committee consisted of the following Members:Frank Cranmer, Emily
Commander, Committee Clerks †
attended the Committee Standing Committee ATuesday 23 May 2006(Afternoon)[Sir John Butterfill in the Chair]Finance (No. 2) Bill(Except
clauses 13 to 15, 26, 61, 91 and 106, schedule 14 and new clauses
relating to the effect of provisions of the Bill on section 18 of the
Inheritance Tax Act
1984)
Clause 70Restrictions
on companies buying losses or
gains Amendment
proposed [this day]: No. 106, 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.'.—[Mr.
Goodman.] 4.30
pm Question
again proposed, That the amendmentbe
made.
The
Chairman: I remind the Committee that with this we are
discussing the following amendments:No. 107, 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, 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, page 60 [Vol I], leave out lines 25 to
28. No. 110, page 60,
line 29 [Vol I], leave out from beginning to end of line 2 on page
61.
The
Paymaster General (Dawn Primarolo): Good
afternoon, Sir John, and welcome to this afternoon’s sitting.
When we broke for lunch, I was responding to amendments Nos. 106 to
110, which were tabled by the hon. Member for Wycombe (Mr. Goodman).
His points on amendment No. 107 related to section 176 of the Taxation
of Chargeable Gains Act 1992, which covers some of the same ground as
clause 69 in that it could be used to combat avoidance involving the
artificial creation of losses. Section 176’s remit, however, is
wider than just avoidance.
Section 176
covers purely commercial situations that would otherwise produce an
unfair result for tax purposes. For example, if a company pays a
distribution out of pre-acquisition profits prior to being sold,
section 176 ensures that the correct amount of capital loss is
recognised on the sale. To pay the dividend might well be a normal
commercial judgment, but it is still appropriate to apply
section 176. It has no purposive anti-avoidance test; rather, it is an
objective test that is well understood and
respected. Like
amendment No. 107, amendment No. 108 has nothing to do with the rest of
the clause but touches on something else. It does not touch on the
targeted anti-avoidance rules, but would remove a rule that applies
only to life insurance companies with holdings in unit trusts and
open-ended investment companies. Because they are charged tax on
movements in the value of such holdings and not just on disposals,
there is a unique relieving rule that allows them to carry back losses
to the two previous periods. No other type of company is allowed to
carry back capital losses. When an insurance company changes group, the
current law prevents carry-back except where the losses arose on the
assets that the company held before joining the new group. That is in
line with the general thrust of the loss and gain buying
rules. The Bill will
update legislative references and provide a minor relaxation of the
restrictions on carry-back of losses. I am not sure what prompted
amendment No. 108. The hon. Member for Wycombe said that it was probing
and not directly relevant. On that basis, I do not accept it. However,
because the point that he raises could none the less be advanced, I
shall say to him that Her Majesty’s Revenue and Customs has
recently issued a consultation document on taxation of life insurance
companies. That is the right place to raise such issues regarding
future intentions. I do not think that his point is necessarily
relevant
here. Amendment No.
110 is strange. It would remove a transitional rule included in the
Bill as a result of representations from companies and their advisers.
It is strange to want to remove that. Subsections (9) and (10) are
intended to provide additional relief for companies that have
undertaken certain transactions prior to the pre-Budget report that do
not involve gain or loss buying but that could have been subject to
restrictions on their use of capital losses. They have been included
because companies asked that the draft legislation include improved
targeting in that specific area. The Government recognised that the
original draft could be improved and responded accordingly. I cannot
see any good reason why the amendment should stand, although I hope
that the hon. Gentleman will accept my explanation. In effect,
amendmentNo. 109 would remove from the scope of the clause
any tax-driven purchase of a company that occurred before the
pre-Budget report. If we were to accept that amendment, the subsection
that it would remove would be unnecessary. However, as I do not believe
that the amendment would have that effect, amendmentNo. 110
should also be rejected.
I hope the hon. Gentleman will
accept those explanations of how the clause works and why this large
group of amendments would not be
necessary. Stewart
Hosie (Dundee, East) (SNP): I have listened carefully to
the Paymaster General. Throughout her speech, she made continual
reference to the fact that the provision is designed to tackle specific
tax avoidance measures and schemes. However, as yet, I am not wholly
convinced of that. She has said repeatedly that there was an HMRC
informal procedure in which schemes, deals or trades could be checked
to determine
whether they were legal when companies were buying losses or whether
they would fall foul of the provision. That runs the risk, I think, of
companies being in a de facto starting position for almost every
significant commercial transaction.
When a company may acquire
another that has losses, the starting point will be to go to the HMRC
to determine whether it will be a legitimate commercial transaction or
whether it will fall foul of the new rules. That will run the risk of
adding time delays, additional cost and uncertainty to the process of
acquisition. That is
important. We should
look at the various forms of purchase and the reasons for them in
relation to amendment No.106. Companies may buy to extend their market
share; as part of a pre-agreed growth strategy; to extend their
geographic reach; to extend the development and production of sales
capacity; or to gain new technology, expertise or skills. They may buy
as part of a self-financed growth strategy or as part of planned use of
investment cash from elsewhere—for example, from investors or
one of the markets. They may buy or, indeed sell, as part of a takeover
defence strategy or to position themselves after a disposal to take
over another company. They may do so to avoid breaching monopoly and
other fair trade rules. Companies may buy or sell to maximise
shareholder value and fulfil their fiduciary duty. They may buy simply
to diversify to protect themselves in the case of a business that had
been too narrowly focused for the time being. They may also sell
loss-making parts of the business to shore up the remainder or as part
of a strategy to focus on core activity. They may sell in order to
invest
elsewhere. Those
companies that buy particularly to extend their geographic reach or
increase turnover may well find that the best value they can achieve is
to buy what are, at the moment, loss-making concerns. A judgment might
be that the savings could, in the future, be made centrally through
enhanced purchasing muscle and so on and so forth. They may feel that
the name of the company and the reputation of its brand could turn what
was a loss-making purchased company into a profit-making arm. All those
decisions are legitimate and
valid. My worry is
that the changes will add uncertainty, delay and cost to what should be
a normal commercial transaction. I will concentrate on the consequences
of the delay and uncertainty. They could be huge. If a company were
unable to buy a loss-making concern, to put on muscle or perhaps reduce
its value as a takeover defence mechanism and if it had to go to the
HMRC to identify in advance if that was a legitimate transaction, it
could be extremely worrying. Companies that sell may find that there is
no longer a market there if they are trying to divest themselves of a
loss-making arm. If there is a delay in doing that and if the cash is
not brought in quickly, they may end up carrying costs that they did
not anticipate, which may put the rest of the business at
risk. I recognise the
Paymaster General’s earlier concerns, and amendment No. 106
seems to suggest that if companies purchased a loss in any of the ways
I cited and part of the transaction was defined by the HMRC as
legitimate, they could mask a purchase of the loss for the purpose of
tax avoidance, which she referred to earlier. I am not convinced that I
would vote for the
amendment if it were pressed to a vote, but I would like her to address
these legitimate concerns. If we are not satisfied today, we may have
to return to clause 70 and related clauses at a later
stage.
Dawn
Primarolo: To help the hon. Gentleman, we are dealing with
a series of clauses: clauses 69, 70 and 71. I referred to the informal
clearance procedure when we discussed amendments Nos. 105 and 101.
Those were grouped under clause 69, but amendment No. 101 is relevant.
It is the same type of amendment becauseit would include a
statutory clearance procedure in clause 71. It was included in that
group because all the amendments dealt with the same subject
matter. I agree
absolutely with the hon. Gentleman’s general points, which I
also made, on why a statutory clearance procedure was not desirable for
the reasons he gave. Such a procedure was unsuitable for clause 69
because that clause is specific, clear and targeted, and it is accepted
as such. The informal procedure I referred to in response to amendment
No. 101 relates to clause 71. I went on to say that despite the fact
that it was an anti-avoidance measure, it was far more complex than
that. Additional points were necessary, which is why I raised the
informal clearance procedure, the guidance and other supports that the
HMRC would put in place for companies that sought that certainty. I
concur with the hon. Gentleman regarding the undesirability of
statutory clearance requirements in these
clauses. The hon.
Gentleman’s second point relates to clause 70, which introduces
new provisions to deal with capital losses and capital gain buying.
Again, it only applies when the main purpose—or one of the main
purposes—of the arrangements in place was obtaining a tax
advantage. Before the Committee started, you and I reflected on this
matter, Sir John, and on the existing legislation that already dealt
with it, so it is not a new subject or an exclusion that companies
might not be aware of—they are aware of it. The legislation was
designed to stop companies exploiting losses in the ways that we have
discussed.
Unfortunately, ways have been
found around the legislation, which has been in place for quite a long
time. It pre-dates this Government. Clause 70 will repeal the old bits
of the legislation—the gain buying rules that have been
repealed—and includes the anti-avoidance measures. It leaves the
old loss-buying rules, because they still have a purpose. That was the
point of the exchange between myself and the hon. Member for Wycombe
about the amendments that he tabled.
All the fears that the hon.
Member for Dundee, East (Stewart Hosie) suggested would not apply at
this point. There is not an informal clearance requirement and the
clause is straightforward. Therefore, I can confidently reassure him
that some of his examples would not occur. I hope that that clarifies
things, because the three clauses
interact.
4.45
pm Mr.
Paul Goodman (Wycombe) (Con): It is good to see you in the
Chair, Sir John. If I may interact withthe Paymaster General
about her response to the amendments as
follows—
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