Standing Committee H
Thursday 15 June 2000
[Mr. Frank Cook in the Chair]
(Except clauses 1, 12, 30, 31, 59, 102 and 113)
Tax treatment of acquisition, disposal or revaluation of certain rights
Question proposed, That the clause stand part of the Bill.
Mr. Richard Ottaway (Croydon, South): We are now in the exhilarating world of the Wireless Telegraphy Act 1949. I will be brief, as I know that the Financial Secretary has to be elsewhere shortly. I want to make four primary points, and I imagine that the Treasury has had the opportunity to consider them all.
The first point concerns the definition of indefeasible rights to use telecommunications cable systems. Many feel that the definition should be extended to cover radio and satellite transmission parts, and preferably future transmission media yet to be defined, as well as relevant telecommunications technology and dark fibre if it is not already included. The matter is of some interest to the industry, so perhaps the Financial Secretary could tackle it.
My second point is that the industry feels that the legislation discriminates against IRUs entered into before 21 March 2000. Given that indefeasible rights of use are a recent development and that contracts normally have a life of 12 to 22 years, it would seem equitable to permit relief for IRUs entered into before 21 March 2000 at least to have effect from that date.
Thirdly, the legislation seems to discriminate against IRUs acquired from an associate or an associated company. The industry finds it difficult to understand such discrimination and considers that transfer pricing rules should be sufficient to deal with the subject.
Fourthly, the legislation deals only with disposals of acquired IRUs and does not deal with the tax treatment of the grantor of an IRU. Clarification of that tax treatment is urgently required.
I appreciate that those are all highly technical points, but I know that the Financial Secretary's response will be of interest beyond the Committee.
The Financial Secretary to the Treasury (Mr. Stephen Timms): I am grateful to the hon. Gentleman for those points and the way in which he made them. The clause and schedule 23 provide for tax relief to be given, as announced in the previous Budget, for the cost of acquiring third generation spectrum licences and any other spectrum licences auctioned in future. Relief will also be given for the cost of acquiring, on or after 21 March 2000, capacity on telecommunications cables, which is known as indefeasible rights of use. Receipts from the disposal of those rights will be taxable.
The rights are now regarded as capital assets, and the acquisition cost does not qualify for deduction. However, the cost does not qualify for capital allowances. The clause and schedule will remedy the gap by providing that the IRUs will be treated as revenue items and relieved over the life of the rights. Any receipts for disposal of all or part of such rights will be taxed as trading receipts. That will level the playing field in matching relief enjoyed in other tax administrations and help to open up the on-line world to competition.
Relief will be spread over the life of the asset. The cost to the Exchequer will depend in part on how much is paid for the licences or IRUs, but the net cost to the Exchequer is expected to be negligible in practice, as most operators will manage to secure relief by holding licences in an offshore subsidiary and paying the subsidiary a royalty or rental fee that is deductible for tax purposes.
The hon. Gentleman asked some specific questions. It has been suggested that the relief provided by the schedule might be extended to IRUs in all types of transmission path. As the Budget resolution that covers the clause and the schedule relates only to telecommunications cable systems, it might be difficult to widen the provision at this stage. In fact, the Budget announcement related to IRUs in international submarine cables, as that was the object of the representations made to us.
Immediately after Budget day, we received several queries about why the relief was so restricted. As a result, we decided that relief should be available for all IRUs in telecommunications cable systems, in accordance with the representations that we had received at that stage. Following the Budget resolutions, further representations were made for IRUs in other media, not just in cable systems, and it might be appropriate to consider extending relief in that way. We have already announced that we shall consider the possibility of providing tax relief next year for other intangible assets, and we shall consider the case for other types of IRU as part of that review.
The hon. Gentleman also asked about extending relief beyond the application in the Bill to include the acquisition, disposal or revaluation of IRUs. I do not believe that that is necessary. The original representations that we received about IRUs related to the business cost of acquiring the IRU, which did not qualify for tax relief. The aim of the new provision, therefore, is to provide relief for the cost of those particular intangible assets following depreciation shown in the accounts. It is logical that, when the person who acquires the IRU disposes of it or revalues it in his accounts, we should be able effectively to claw back excess tax relief by charging the disposal receipt or the revaluations.
The owner of a cable already qualifies for capital allowances on the cost of installing the cable. If, on finding that he has certain capacity, he grants an IRU, he is disposing of a capital asset and will therefore be liable to tax on the capital gain. If, however, he built the cable with the intention of selling off part of the capacity for profit, he will be liable to tax on the consideration as a trading receipt. In both cases, he will continue to own the cable and enjoy capital allowances on its original cost. That is a logical arrangement.
The hon. Gentleman also raised the possibility of removing revaluations from the scope of the schedule. Paragraph 3 of schedule 23 ensures that any increase in the value of the licence or IRU that is recognised in the accounts, even if it is not taken to the profit and loss account, is charged as income, regardless of where it is credited in the accounts. Amortisation of that higher value will be relieved as and when it is taken to the profit and loss account.
If the hon. Gentleman's suggestion were accepted, taxpayers could keep revaluing their licences or IRUs, thereby increasing the amount on which depreciation could be claimed, and no compensating tax charge would apply. Therefore, if the directors thought that previous amortisation rates had been excessive, they could correct the position on the balance sheet by revaluing the asset, but the excessive tax relief already enjoyed would not be clawed back. Nevertheless, they would in future be able to claim amortisation of the revalued amount. That would not be a sensible or prudent arrangement.
I hope that I have answered the hon. Gentleman's helpful questions on the clause.
Mr. Oliver Letwin (West Dorset): I declare what is for once a genuine interest. I hope that the Financial Secretary will seriously consider the tax treatment of IRUs in non-cable telecommunications assets; the United States authorities have switched the accounting treatments so that the revenue is recognised even though the cash flow may come from the sale of an IRU at the front end. The revenue is to be recognised across the life of the IRU, usually about 10 years, and it makes abundant sense in that domain too for the tax treatment and the accounting treatment in the United Kingdom to follow the United States pattern. I was encouraged to hear that the Minister will take note of that; whether action is taken this year or next year is immaterial, but it is important that it should be taken soon.
Mr. Timms: I assure the Committee that we will carefully consider the matter.
Question put and agreed to.
Clause 86 ordered to stand part of the Bill.
TAX TREATMENT OF AMOUNTS RELATING TO ACQUISITION ETC. OF CERTAIN RIGHTS
Amendments made: No. 327, in page 458, line 27, leave out from second `the' to end of line 28 and insert
`amount of any profits chargeable to income tax or corporation tax'.'
No. 328, in page 458, line 32, at end insert
`if the associate or associated company acquired the IRU before that date'.'ó[Mr. Timms.]
Schedule 23, as amended, agreed to.
Clauses 87 and 88 ordered to stand part of the Bill.
Restriction of gifts relief
Mr. Howard Flight (Arundel and South Downs): I beg to move amendment No. 357, in page 63, line 35, after `company' insert
`and at that time arrangements are in existence (or there are arrangements for arrangements to come into existence) which provide or provided for the disposal of those shares and securities to any other person or for the transferor or any person connected with the transferor to receive or be entitled to receive any value at any time derived from those shares or securities'.'
The proposals deal with capital gains tax anti-avoidance measures. I want to make two points of principle before I speak to the amendment. First, I have observed a tendency in recent years in language and approach for avoidance and evasion to be viewed as the same thing; sometimes the words are used in the wrong context. My hobby-horse is that one of the great strengths of anglo-saxon civilisation is the clarity of the law and the difference between avoidance and evasionóbetween what is within and without the law.
Dr. Nick Palmer (Broxtowe): Is the hon. Gentleman saying that only the anglo-saxon nations have clear law?
Mr. Flight: If the hon. Gentleman will be more patient, my point will become apparent. In Germany there is no such distinction within the law and millions of Germans evade tax on interest, which is socially acceptable. It has been the cause of the unwise withholding tax proposals, which I commend the Government for resisting.
A strict line between what is within and without the law helps to keep a society honest; if that line is blurred, it permits what is not honest. Companies and individuals will, naturally, try to keep their tax liabilities as low as possible within the law, and it is the job of Government to ensure that they cannot do so. Evasion is a different matter, and should always be treated as such.
Secondly, our tax laws have been hugely cluttered with anti-avoidance measures introduced by the Government and by the previous Administration. There is little point in having a splendid committee to consider the drafting of tax law and trying to simplify it when the problem is the complications of the underlying legislation.
Avoidance occurs largely when taxation rates are perceived as unacceptably high by those on whom they fall. In Hong Kong, there is a 20 per cent. tax on everything; there is a consensus to pay it and no tax avoidance industry, and tax law remains simple. United Kingdom Governments could learn an important lesson from Hong Kong; our tax law is becoming over-complex for business and will inevitably lead to injustices because of the almost paranoid attempt to deal with all potential avoidance schemes.
The amendment is designed not to oppose the measure in principle but to draw attention to situations in which innocent transactions may be affected, when employee trusts, charities or bona fide trustee ownership of corporate assets may be improperly or unfairly damaged by the measures.
Clause 89 removes the long-established holdover relief on gifts of shares to a company; the Government say that the measure is to combat tax avoidance schemes in which holdover relief is claimed as part of a scheme to on-sell the shares, and hence to escape capital gains tax. If it is designed to avoid people or companies who make genuine gifts and do not receive any value from the transactions, the amendment should be flagged as an anti-avoidance measure and pegged to the avoidance scheme referred to in the explanatory notes. The amendment would add arrangements to catch avoidance schemes, however staggered, for the transferor to generate value from the gift for himself or a connected person.