Mr.
Hoban: I am not going to go into that because it distracts
from our purpose. A problem I have detected with our adumbrations is
that sometimes too much detail gets in the way of the thrust. It is
important for those outside this debate to have their minds focused on
the essence of the argument, rather than be distracted by the hon.
Member for Wolverhampton, South-West (Rob Marris) down the highways and
byways of the voluminous legislation that underpins our proceedings
today. That deals
with section 209. [Interruption.] Letme come back to
the second issue, where the sub-participation is to a connected party.
There are some issues around the timing of interest payments and
whether that is a timing difference, and there are some issues around
transfer payments, but in the view of the Chartered Institute of
Taxation that is neither here nor there. However, there is a concern
that where a connected party is involved there may be no relief
available for impairments due to the denial of connected party
impairments. Its belief is that in the original drafting this appears
to be unintentional; I would be grateful if the Paymaster General were
to confirm that that is indeed the case—or that her Government
amendments Nos. 66 to 70 address this
concern. Mr.
David Gauke (South-West Hertfordshire) (Con): In a similar
spirit, may I just raise a couple of points that the Law Society has
highlighted in respect of schedule 6, and ask whether the new wording
introduced by the Paymaster General will address those concerns? The
first relates to basic principles of loan relationship legislation. I
assure the House that the Law Society guidance was not produced by my
wife, although it was produced by my former law firm—I stress
the “former”, so I have no financial interest to declare.
According to the Law Society brief,
“The general
rule is that the items that are brought into account and the timing of
any tax charge or relief are determined in accordance with the
company’s accounting treatment”,
but the view is that the original wording
of schedule 6 undermined that principle. The Law Society
states: “The
effect is that once a company has determined the relevant profits and
losses on its loan relationships that are reflected in its accounts, it
will have to consider separately whether those credits and debits
‘fairly represent’ its profits and
losses”. The Law
Society’s concern is about the degree of uncertainty, because
there does not appear to be any guidance on how a firm should make that
assessment. My second
point is similar to one mentioned by my hon. Friend the Member for
Fareham (Mr. Hoban). It is about whether the new provision will catch
all forms of intra-group lending. The Law Society does not believe that
that is the intention, but perhaps clarification would be
helpful.
The
Chairman: I hope that the Paymaster General will not be
tempted to respond to the question asked by the hon. Member for
Wolverhampton, South-West, because I have just checked, and the
relevant section covers no fewer than five
pages.
Dawn
Primarolo: Thank you, Sir John; I shall be brief, then.
First, as the hon. Member for Fareham (Mr. Hoban) identifies, amendment
No. 66 relates to a measure dealing with avoidance schemes that rely on
accounting rules to cause profits on loan relationships to be
de-recognised, and so fall out of tax charges. He is quite right that
concern was expressed about the original drafting, which would have
meant that the measure applied to certain types of normal, commercial
transactions such as hedging arrangements and sub-participations
entered into by banks. The Government listened very carefully to
representations and accepted that the original drafting may have gone
too far. Amendment No. 66 has effectively rewritten the measure so that
it is more narrowly focused on the avoidance scheme at which it is
aimed, and ensures that it does not catch commercial
activities.
As for the
hon. Gentleman’s two points on certain banking
sub-participations, the measure will not affect the banking
sub-participation market. The complaint was in connection with the
application of the connected party rules on impairment losses, but the
measure will not make banks and their associates any worse off. The
hon. Gentleman made a further point about connected party bad debt
rules. The anti-avoidance measure in the Bill does not actually deal
with that, and if there is a problem, this is not the place in the Bill
in which to try to solve it. I say to the hon. Gentleman and those who
read our deliberations that if banks consider there to be a serious
problem on that issue, I will ensure that my officials discuss those
issues with the banking industry very quickly. I do not believe that
the matter is specifically connected to the clause, but if that subject
is being raised as an issue, the industry needs to come forward
formally with it in discussions. We would be happy to hear what it has
to
say. Amendments
Nos. 67 to 70 make small but important changes that modify the shares
as debts rules introduced last year. I think that they are
straightforward, and perhaps I do not need to reflect on them. The hon.
Member for South-West Hertfordshire (Mr. Gauke) asked about loan
relationships, and I touched on that under
contracts.
5.15
pm As I said,
having listened carefully, the Government are undertaking in the
amendments to put beyond doubt what they believe the position always
has been in respect of this matter. Most commentators now accept it,
but a few have argued that tax computational laws, which rely on
accounting recognition of profits, override the basic requirement that
amounts brought in to charge for tax are those that fairly represent
profits and gains arising to
companies. The measure
does not undermine the principles of the two regimes—that is the
important message. In fact, it supports them by basing the tax measure
of income on normal commercial accounting, which we would expect fairly
to represent accruals profits and gains arising to the company, so
there is no need for uncertainty. That is the long answer. Basically,
we listened to the points that were made and amended the legislation
accordingly. There
seems to be one further point in respect of connected party bad debt
rules, which was not part of the submissions from others. It would not
be dealt with in the schedule anyway, as it is not relevant. However,
as I said, if there are particular issues outstanding, I would be more
than happy to ensure that they are passed on, and to arrange for
officials to meet the industry to discuss
them. Amendment
agreed to.
Amendments made: No. 67,
in page 187, line 42[Vol I], leave out
‘relevant'. No.
68, in page 188 [Vol I], leave out lines 6 and
7. No. 69, in page
188, line 18 [Vol I], at end
insert— ‘(5A) The amendments
made by sub-paragraphs (2) and(3) have effect in relation to
any share held by a company on or after 12th May 2006 in any case
where— (a) the
share is redeemable for the purposes of section 91D of FA 1996 as a
result of any arrangements mentioned in subsection (2)(b) of that
section (as substituted by sub-paragraph (2)),
and (b) the
arrangements were entered into after the company acquired the
share. (5B) But in that case,
in relation to an accounting period beginning before 12th May 2006,
amounts are to be brought into account for the purposes of Chapter 2 of
Part 4 of FA 1996 as a result of those amendments only if the amounts
relate to any time on or after that
date.'. No.
70, in page 188, line 19 [Vol I], at beginning insert ‘In any
other case,'.—[Dawn
Primarolo.] Question
proposed, That this schedule, as amended, be the Sixth
schedule to the
Bill.
Mr.
Hoban: I wish to raise some issues about schedule 6 that
have been brought to my attention, principally by the Law Society. The
first is a change introduced in the Budget and proposed in paragraph 4
to the rules concerning mandatory convertible securities and the deemed
disposal of those securities on 2 March 2006. There is concern that
intra-group reorganisations or transfers might lead to a tax charge
being payable, despite the fact that the group had not sold the
security.
I shall go
into more detail. As the Bill stands, a company that holds the benefit
of a mandatory convertible security on 22 March 2006 is treated as
making the disposable security at its market value on that date. The
resulting gain or loss is brought into charge to tax when the company
ceases to hold the security. The provision would bring the deferred
gain or loss into charge to tax on any disposal in paragraph
4(6)—even on an intra-group transfer or reorganisation, when a
company, or group of which it is a member, has not realised any
economic benefit from the disposal. Will the Paymaster General
confirm that in such circumstances the deferred gain or loss would
actually be deferred, and that no tax would be payable until there was
a real economic disposal of the mandatory convertible security? I
understand that such an approach would be consistent with that adopted
for money debts that were chargeable assets when the loan relationship
rules under the Finance Act 1996 were introduced. That is my first
point. Paragraph 5 is
the subject of my second point, on which my hon. Friend the Member for
South-West Hertfordshire may have touched during the debate on
Government amendment No. 66. Again, the concern is that the paragraph,
which looks relatively innocuous, states that
“Section 85A of FA
1996...is amended as follows...In subsection (1) (amounts to
be brought into account are those recognised in determining
company’s profit or loss) after “Subject to the
provisions of this Chapter” insert “(including, in
particular, section
84(1))”. The
Paymaster General touched on the issue during her response on the last
group of amendments. The concern is that the paragraph seems to change
the basis on which interest and other aspects of the loan relationship
are treated. Historically, they have been treated in accordance with
accounting principles. There is concern that paragraph 5 changes that
so that when companies have drawn up their accounts in line with
generally accepted UK accounting practice, they have to work out what
“fairly represent” means, without having the guidance to
enable them to do so. There is concern that if there is such a change,
more guidance ought to be provided to taxpayers to help them understand
what “fairly represent” means in the circumstances and
why it overrides general UK accounting practice.
My third
point relates to paragraph 10 of the schedule and to intra-group
lending. I think that my hon. Friend touched on the issue earlier;
perhaps the Paymaster General does not need to refer to that point, but
I should be grateful for her thoughts on the treatment of deemed
disposals on mandatory convertible
securities.
Dawn
Primarolo: The transitional rules work in a fair way. When
a mandatory convertible is first brought within the loans relationship
regime, a capital gain is calculated by reference to fair value at that
time. However, that gain is not taxed until the company disposes of the
convertible. Any amount of tax under the loan relationship rules cannot
be brought into accounting in any other way, so it cannot be included
in the working out of capital gain; it is not clear how it is thought
that there would be a problem.
As most
mandatory convertibles appear to be used for tax avoidance purposes,
there is unlikely to be any commercial reason why they should need to
be subject to a group reorganisation and there is no reason for a more
generous regime than is in the Bill. I dealt with the
hon. Gentleman’s second point in answering his hon. Friend the
hon. Member for South-West Hertfordshire. It is the Government’s
view that the measures before us are a fair representation of what we
always believed was the case. However, some commentators argued to the
contrary, so the change will put the matter beyond doubt. The measures
will reassert the Government’s view on how the rules should
work. I remind the
hon. Member for Fareham that we are trying to deal with avoidance. A
great deal of care has been taken to consider specifically how to
target and deter avoidance without causing problems for legitimate
commercial relationships. I hope that he will accept
that. Question put
and agreed
to. Schedule 6,
as amended, agreed
to. Clause 77
ordered to stand part of the
Bill.
Clause
78Controlled
foreign companies and treaty non-resident
companies Question
proposed, That the clause stand part ofthe
Bill.
Dawn
Primarolo: I hope that the Committee
will bear with me as I introduce clause 78. It is important that I put
some points on the record to assist everybody using our deliberations
and the Government’s
clarifications. Clause
78 deals with controlled foreign company legislation and is designed to
prevent UK companies from diverting profits to low-tax regimes. It is
important to remember that the only companies that face a charge under
CFC legislation are those that divert profits from the UK to avoid UK
tax. Unfortunately, CFC legislation is constantly under attack from
those who seek to avoid Parliament’s intentions. This Government
and previous Governments have had to add additional anti-avoidance
rules to ensure that it remains fit for purpose.
Clause 78 will block a loophole
in one such piece of anti-avoidance legislation, section 90 of the
Finance Act 2002. The particular mischief that concerned the Government
then and now was that companies can artificially migrate to another
country simply to avoid the effect of the CFC rules by using the
provisions of a double taxation treaty.
It was widely
accepted at the time that such migrations might have become possible as
a consequence of the exemption from corporation tax of
companies’ chargeable gains from substantial shareholdings,
which came into effect on 1 April 2002. The exemption was welcomed by
business, which was also fully involved in developing section 90.
Companies that migrated before 1 April 2002 were excluded from section
90, not least because they did not have the benefit of the substantial
shareholdings exemption when they migrated.
The Government have since
become aware that some excluded companies are being used in tax
avoidance schemes, and clause 78 seeks to counter such schemes. We have
targeted the clause as tightly as possible to avoid leaving open
unacceptable risks of continued avoidance on one hand and, on the
other, to continue
to exclude companies not involved in tax avoidance. The clause does so
by focusing mainly on the type of company used in marketed tax
avoidance schemes. Condition A focuses on
companies that have never owned any subsidiaries and are available to
use as special purpose vehicles in avoidance schemes. If we left it
there, we suspect that, such is the ingenuity of tax planners’
imaginations, it would not be long before companies that happened to
own a subsidiary or two were used instead, so condition B aims to
forestall all such manipulation.
5.30
pm Condition B is
designed specifically not to catch migrated companies that are already
the parent of multinational groups and continue to act as the parent of
the same group. Such companies are outside the scope of the clause and
will not be affected by it when the group makes acquisitions, including
sizeable acquisitions, within its own sector in the normal course of
its business. Any company that is in doubt as to how the clause will
apply should seek clarification from HMRC, but I hope that I have put
clearly on the record what is outside the scope of the clause and that
no further clarification will be
required. The changes
introduced in the clause ensure that from 22 March 2006 the position is
returned to that intended in 2002. The clause will prevent tax
avoidance and ensure greater consistency between companies that became
non-resident at any date. I commend the clause to the
Committee.
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