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Session 1999-2000
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Standing Committee Debates
Finance Bill

Finance Bill

Standing Committee H

Tuesday 13 June 2000


[Mr Frank Cook in the Chair]

Finance Bill

(except clauses 1, 12, 30, 31, 59, 102 and 113)

Clause 65

Taper relief: taper for business assets

10.30 am

The Chairman: We have reached the clause 65 stand part debate. I understand that my co-Chairman, Dr. Clark, permitted a wide debate on amendments Nos. 276 and 277, which were disposed of on Thursday afternoon. I also gather that the debate at that time ranged over the subject matter of some of the amendments to clause 66. In view of the wide-ranging debate, I call for short interventions on the amendments tabled to clause 66. Those interventions should concentrate so far as possible on matters not raised in debate on amendment No. 276.

When we have disposed of the amendments to clause 66, a clause stand part debate may not be necessary.

The Chairman, being of the opinion that the principle of the clause and any matters arising thereon had been adequately discussed in the course of debate on the amendments proposed thereto, forthwith put the Question, pursuant to Standing Orders Nos. 68 and 89, That the clause stand part of the Bill.

Question agreed to.

Clause 65 ordered to stand part of the Bill.

Clause 66

Taper relief: assets qualifying as business assets

Mr. Howard Flight (Arundel and South Downs): I beg to move amendment No. 278, in page 45, line 22, after ``paragraph'', insert-

    `3. (Rules for determining whether a gain is a gain on the disposal of a business asset or a non-business asset), after sub-paragraph (5) insert-

    ``(6) Where sub-paragraph (2) of this Paragraph applies the person to whom the gain accrues shall be entitled by notice given within a period of two years immediately following the tax year in which the gain accrues to elect as at the date when the asset became or (as the case may be) ceased to be a business asset to have the asset treated as if it had been sold on that day by the person making the disposal and immediately re-acquired by him at its market value at that date and the provisions of sub-paragraph (5) shall mutatis mutandis apply to the two gains for the purposes of paper relief'' and in paragraph'.

I bid you good morning, Mr. Cook. The amendment is our only amendment to clause 66 that relates to the debate last week. It simply picks up the issue of apportionment. Frequently, apportionment on a straight time basis for allocating the gains on a straight line across a period of ownership can be unfair. That is especially true in the case of the new definitions of business assets and of whether people owned assets before the changes in the Budget.

Mr. Michael Jack (Fylde): On a point of order, Mr. Cook. There is a great deal of noise outside the Room. I think that we shall all find it difficult in the early stage of our proceedings to hear hon. Members' remarks. I would like that fact to be recognised.

The Chairman: I concur. [ Interruption.] As hon. Members can hear, new Labour has learned something about stage production. Had they not noticed?

Mr. Flight: The point was implicitly recognised in 1965 and in relation to the 1982 rebasings. The mechanics that the amendment would introduce would allow a taxpayer to elect to have his asset valued at the date on which it changed into a business asset, so that an especially large growth attributable to the time at which it was a business asset would be recognised in the calculation of the gain and relief due. The amendment would provide one answer to the problems that we debated at length last week.

The Economic Secretary to the Treasury (Miss Melanie Johnson): As the hon. Gentleman explained, the present rules work by apportioning the total gain on a time basis, according to the length of the time that the asset has been a business asset and a non-business asset, and applying the appropriate taper to the respective parts of the gain. Let us suppose that an asset has been held for five years in total, for two years as a non-business asset and for three years as a business asset, prior to its being sold at a gain of 1,000. The gain would be apportioned into a non-business gain of 400 and a business gain of 600. Those gains would be treated as relating to separate assets held for the full period of ownership. The 400 gain would be reduced by five years' worth of non-business taper relief, and the 600 gain would be reduced by five years' worth of business taper relief.

The amendment would give the person selling the asset the right to elect for a different approach. The market value of the asset at the time that it changed from being a non-business asset to a business asset would need to be determined, and the gains of the respective periods would need to be calculated.

Apportionment has been given an increased profile as a result of the changes made in clause 66 to relax the rules for a shareholding to qualify as a business asset. Many shareholdings that were not business assets before 6 April 2000 will become business assets from that date. When the shares are eventually sold, the gain will need to be apportioned, and the business and non-business tapers will be applied to the respective parts. Although the amendment is not limited to the change of status at 6 April 2000, in the near future, that is likely to be the principal reason for a change in status.

I understand why the amendment has been tabled, and in principle it is not without its attractions. However, I cannot recommend it for several reasons. First, determining the market value of the asset at the time that it changes from being a non-business asset, or vice versa, would be a considerable compliance burden for both taxpayers and the Revenue. For quoted shares, people would have no difficulty. They would simply look up the value in the stock exchange list. However, complex and sometimes lengthy negotiations are necessary to establish the market value of unquoted shares, land and other assets.

Secondly, that difficulty would be compounded if an asset were to make multiple changes between business and non-business status. The wording of the amendment is not sufficiently precise for it to be clear whether multiple valuations are envisaged, but carrying through the principle would suggest so. The time apportionment basis copes with such circumstances much more straightforwardly.

Thirdly, it is no answer to say that market value needs to be determined only when an election must be made. Any taxpayer would want to compare the outcomes of both approaches before deciding whether to elect for the valuation approach.

Fourthly, the burden of having to establish the taxable gain under both approaches would add considerably to the complexity of the capital gains tax system for that aspect. Fifthly, under the amendment, the deemed disposal and reacquisition at the time of the change of status would give rise to a gain taxable at that point, rather than at the time of the subsequent actual disposal. That would entail taxing part of the gain in a year that may be some time before the year of disposal. Re-opening and revising the tax due for that year would be difficult under self-assessment. The question would also arise of whether interest should be payable in respect of tax due for that year. Although I accept that ways may be found around that, such as charging all the parts of the gain at the time of the actual disposal, that would not be the effect of the amendment.

Finally, the time limit of two years within which the election would have to be made would not fit with the time limits for making and amending tax returns under self-assessment.

If the hon. Gentleman believes that such an election would be appropriate, notwithstanding all the difficulties involved-the same effect could be achieved by selling the assets and reacquiring them soon after 6 April 2000-I cannot accept that. An actual sale and reacquisition would have taxation consequences at the time, which would be taken into account for that year. An election would not have effect until the asset was eventually sold for good, and would then re-open the tax consequences of an earlier year. It is one thing for a person to sell and later to reacquire an asset, but if a person does not, I do not understand why an election should be possible to allow the person to be treated as though he had, especially given the practical difficulties that such an election would create. If the hon. Gentleman will not withdraw the amendment, I shall urge members of the Committee to reject it.

Mr. Oliver Letwin (West Dorset): Before my hon. Friend the Member for Arundel and South Downs responds, without repeating the detailed debate that we had in our previous sitting, I should like to make some comments in the capacity of an amateur Cassandra.

The Economic Secretary's response and the tenor of our previous debate clearly suggest a major dawning problem. The apparently clear distinction between business and non-business assets turns out to be anything but clear. Were it clear, assets would be either business assets or not. The whole of this and the preceding debate arises from the fact that assets can move between those categories. Business asset status is metaphysical, and does not inhere in the asset. The Economic Secretary probably does not believe me now, but if she is fortunate enough to remain in her current job for a little while longer, she will believe me later. I prophesy that there will be an industry in finding ways of classifying and reclassifying assets and their relationships to the people who hold them, in and out of business status, and a significant portion of her officials will be occupied in tracking them down. If the current situation obtains for much longer, I regret that successive Finance Bills will try to close off ``loopholes'', which owe their origins to an unfair distinction in the first place.

We stand at the threshold of a long legislative journey, at the end of which nothing will have been gained, except by accountants in the private sector who will create a good deal of toil and trouble for officials in the public sector. In the light of this and the preceding debate, I hope that the Economic Secretary will consider whether the distinction holds up at all, and whether it will be workable as a long-term proposition. The speech that she just read out was, to the average mind, a model of complexity and unclarity. I suspect that if she were to stand up and make that speech in her constituency on Friday, eyes would stand out on stalks. That is not because it was an inadequate or improper speech but because she has removed herself from the ordinary world, via the business and non-business asset distinction, into a world of complexities and refinements that most people will not understand. That is exactly the kind of world in which the accountancy profession, at its most ingenious, revels. Part of the disadvantage of creating a distinction that is not clear is that the rich-large companies and rich individuals-can always find ways of being a step ahead, perfectly legitimately, of the Economic Secretary's officials, while those who are not rich cannot. Such patterns have evolved under many previous Administrations, of varying colours, who have introduced similar distinctions and suffered the same consequences. A widening gap will open between those who know how to manipulate such extraordinarily complex distinctions and those who do not.

Paradoxically, as the Revenue, under the Economic Secretary and her successors, seeks to block off successive loopholes, the gap will widen between those who can afford the necessary advice and those who cannot. Merely understanding the way through the thicket-layer upon layer of blocking off of increasingly subtle loophole manufacture-will be a highly expensive activity. Eventually, which is why I say that I am a Cassandra, the Economic Secretary or her successors will abolish the underlying unclear distinction because it will not work. I suspect that the Economic Secretary does not believe that, but she will. It would be good if it dawned on her earlier rather than later-that is an unintentional pun-as, otherwise, although no great and lasting damage will have been done to the British economy, an awful lot of time, trouble and money will have been spent needlessly.

If this and the preceding debate have done nothing else, they have at least served to alert us to that problem.


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