Discounted securities etc
Mr. Flight: I beg to move amendment No. 167, in page 80, line 15, at end insert
'or for the transfer of the whole or part of a business or interest in a business carried on by him or by him and others in partnership;'.
Clause 102 makes two changes to the rules for relevant discounted securitiesthat is, securities held by persons not within the charge to corporation tax and issued at a discount compared with the eventual amount payable on redemption.
The first change relates to an earn-out right in the form of a qualifying corporate bond when a double charge to both income tax and capital gains tax could arise. Modifications in the Bill, which is deemed always
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to have had effect, includes the value of the earn-out right in the issue price of the security, which should eliminate the risk of double charge.
The second change is a restriction on any loss on the transfer to a commercial person of a relevant discounted security by a person who acquired it on its issue, paid more than its market value at the time of issue and is connected with the issuer. There is a similar effect when the issuer is a closed company and, although the person in question may not be connected with the closed company, he and any other persons who issue securities of the same sort taken together control the company. The new rule applies from 26 March 2002 when the change was announced and restricts the loss in such cases. There is no motive test.
The Law Society is the main professional body to comment on the clause and is essentially the author of the amendment. Its purpose is to ensure that the clause applies when business assets as well as shares or debentures are exchanged for earn-out rights.
Mr. John Burnett (Torridge and West Devon): I endorse the point made by the hon. Member for Arundel and South Downs. It is important, especially for small businesses, which often sell assets rather than the shares of the company for tax as well as other reasons. It is also important to retain a flexible economy and to allow people to organise their own affairs satisfactorily. These assets probably provide their only pension, and when selling a business or smoothly passing over a business, often assets rather than shares are sold. I hope that the Government will help the small business sector by accepting the amendment.
Dawn Primarolo: The circumstance of double taxation raised by the hon. Members for Torridge and West Devon (Mr. Burnett) and for Arundel and South Downs is not a problem that the Revenue has seen, and as far as we know it has not arisen. However, the amendment seeks to prevent a double charge to income tax and capital gains tax and, although we do not believe that that would arise, the amendment would make the matter clear. I am therefore persuaded by the hon. Gentlemen that it would be wise to accept it, and I recommend it to my colleagues accordingly.
Mr. Flight: What can I say? Thank you, Minister. The issue is obviously not an awe-shaking one, but I have often banged on about the fact that clarity in our tax law is a great virtue to be preserved, and the amendment provides clarity.
Mr. Burnett rose
The Chairman: I am sorry, but the hon. Member for Arundel and South Downs has resumed his seat.
Mr. Burnett: On a point of order, Mr. Gale. May I record my gratitude? Double taxation is indeed unfair, and we are very grateful to the Paymaster General, especially at such an early hour.
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The Chairman: That is not strictly a point of order for the Chair, but it is now on the record.
Amendment agreed to.
Question proposed, That the clause, as amended, stand part of the Bill.
Clause 102, as amended, ordered to stand part of the Bill.
Clauses 103, 105 and 83 ordered to stand part of the Bill.
Gains and losses of a company from intangible fixed assets
Mr. Flight: I beg to move amendment No. 182, in page 373, line 33, at end insert
'except for those assets that are subject to Part 4, paragraph 26 (Realisation of a pre-commencement asset).'.
The Chairman: With this it will be convenient to take amendment No. 183, in page 383, line 11, at end insert
'Realisation of a pre-commencement asset
26.(1)This paragraph applies where there is a realisation of a ''pre-commencement asset'' that is an intangible fixed asset
(a) that was held by the company, or in the same worldwide group, before commencement, as defined by Part 14 of this Schedule, and
(b) on which no deduction has been claimed under Part 2 of this Schedule.
(2) The company can elect to tax the realisation of the pre-commencement asset under the ''existing law'', as defined by Part 14 of this Schedule.
(3) The election must be made in writing to the Board of the Inland Revenue within two years of the end of the accounting period during which the realisation takes place.
(4) In particular, the making of the election will allow the company to roll over the proceeds on realisation of the pre-commencement asset under the replacement of business assets rules in section 152 of the Taxation of Chargeable Gains Act 1992.
(5) Where the creation of an intangible fixed asset straddles the commencement date the election may be made only in respect of the pre-commencement portion. The proceeds on realisation should be apportioned between pre and post commencement on a just and reasonable basis.'.
Mr. Flight: The amendments are designed to allow companies that held intangible assets before 1 April 2002, on which no deduction has been claimed under the new legislation, to roll over the proceeds on disposal under the old rulesthat is, against land and buildingsrather than being able to roll over proceeds against only the acquisition of new intangible fixed assets. In essence, if that were not the case, there would be an element of retrospection in the operation of the schedule. We hope that the Government will take note, and that they will be able to address the issue satisfactorily if they do not accept the amendments.
The Economic Secretary to the Treasury (John Healey): Thank you, Mr. Gale, and good morning. As I said to your co-Chairman on Tuesday, it is a great privilege to join the Committee, and I very much look forward to serving on it under your chairmanship.
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The schedule would enact a major reform of the corporation tax treatment of intangible assets. The reform modernises the corporate tax base, providing relief for the cost of acquiring intangible assets when none had previously been available. Before I turn to the amendments, let me introduce clause 83, and schedules 29 and 30, and explain the background to this important new element of the legislation. It introduces a comprehensive regime that will provide consistent treatment of companies' expenditure and receipts in respect of intangible assets.
The new regime replaces an outdated and, in places, incoherent accretion of rules based on judicial decisions and occasional legislation, which had grown up piecemeal over nearly 150 years. It marks a further step in the Government's programme of corporate tax reform, which is designed to ensure that the tax system reflects the realities of today's business and competes with the best in the world. A modern system for taxing intangible assets will encourage companies to take advantage of new opportunities in the knowledge-based economy and will contribute to the Government's goal of increasing national productivity.
The proposals have been the subject of extensive consultation. The Government have issued six consultation documents since March 1998. The Inland Revenue has established a consultative group drawing on all representative employer organisations, and draft clauses were published with the pre-Budget report by my right hon. Friend the Chancellor of the Exchequer in November 2001. To that degree, therefore, business and tax practitioners and specialists have been closely involved in the development of the new regime, both individually and through their representative bodies. I pay tribute to all those who made a contribution. The Bill has been very much improved by that process, and the reform has been widely welcomed. The proposals have been developed considerably, particularly through the inclusion of roll-over relief and grandfather clauses.
The new regime provides for companies to obtain tax relief for the cost of intangible assets, including goodwill, brand names, trade marks and other intellectual property; in most cases, it will be based on the amortisation reflected in the accounts. The use of accounting write-downs to determine the tax relief breaks new ground, providing greater flexibility and bringing tax and commercial profits closer together.
The coverage of the new regime is also broadly aligned with the accountancy definition contained in financial reporting standard 10. That will ensure that relief under the new rules is available for the full range of intangible assets, with very few exceptions. It will enable the new regime to keep pace with commercial developments, without the need continually to add to the legislation to provide relief for new forms of intangibles as they develop in an increasingly fast-moving business world.
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Mr. Michael Jack (Fylde): Just for clarificationnot necessarily now, but before the end of our debatewill the Minister say what he meant by those delphic words ''with a few exceptions''? I am interested to know what has been left out.
John Healey: What the right hon. Gentleman called my delphic words were ''very few exceptions''. I shall be happy to clarify that at the appropriate point.
Moving from a system of rigid tax rules set out in legislation to one that follows accounting practices will mean that, from the outset, the new provisions, which I hope will be welcomed by all hon. Members, will give us the flexibility for future developments.