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Session 2000-01
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Standing Committee Debates
Finance Bill

Finance Bill

Standing Committee A

Tuesday 8 May 2001


[Dr. Michael Clark in the Chair]

Finance Bill

(Except clauses 1 to 3 and 16 to 53 andschedules 4 to 11)

10.30 am

The Chairman: Before we start today's proceedings, envelopes addressed to members of the Committee are on the Table to be picked up at an appropriate moment. Also, today may be a different sort of day. If changes are made to our programme or times of sitting, we shall do our best through the normal channels to let the Committee know what is happening.

Clause 79

Double taxation relief

Question proposed, That the clause stand part of the Bill.

Mr. Oliver Letwin (West Dorset): I welcome you, Dr. Clark, to what is likely to be the last day on which the Committee sits. I must say on a personal level what a great relief that is. I do not want to trouble the Committee unduly on the clause, but I must raise one important matter. Before I do so, however, there has been some doubt about the calculation of the mixer cap.

I have read correspondence about the mixer cap between the Chartered Institute of Taxation and the Inland Revenue, which has largely laid our doubts to rest. Will the Paymaster General clarify, for the record, how the mixer cap is calculated when some part of tax is disclaimed? On the assumption that the Inland Revenue's interpretation of the current drafting is rational and in accordance with its letter to the Chartered Institute of Taxation, I shall rest easy on that point.

Although the construct is a vast improvement, it remains rather elaborate. I see the Paymaster General nodding. I am a huge optimist, which is useful when entering a general election period. My optimism leads me to believe that it will in future be possible to rewrite schedule 26. It would be wrong to complain about the drafting of clause 79, which is itself polluted and only one line long.

The Paymaster General (Dawn Primarolo): Succinct.

Mr. Letwin: The schedule to which it gives effect is less easy to follow. I hope that it will in time be redone on tax law rewrite principles.

My complaint relates to the dog that does not bark. When the double tax relief saga began last year, a resolution of the problem of subsidiaries that are subsidiaries of subsidiaries was promised as part of the final package. Before I go on, I should declare an interest. I do not know that I have a specific interest, but it is possible that I might.

If a UK-based multinational has a subsidiary A in one country and that subsidiary has a subsidiary B in another country and, in order to move to arrangements that are suitable for the type of onshore pooling that is now implicit, the company decides to flatten the structural holding and to reorganise so that both subsidiaries A and B are held directly, a capital gain might be crystallised by the sale of subsidiary B by subsidiary A to the holding company. I envisage circumstances in which there is a 100 per cent. holding at both levels. Clearly, without a genuine third party sale or profit taken, there is no reason for a gain to be crystallised.

Mr. John Burnett (Torridge and West Devon): Is the hon. Gentleman predicating a circumstance in which the intermediate company effectively steps out?

Mr. Letwin: Yes, I am. It is not a judgment on the part of the intermediate company but rather of the holding company. The mechanism that would be dictated by such a decision is not the stepping out of the intermediate company but the sale by the intermediate company to the holding company of the subsidiary of the subsidiary. We are discussing the sale by the subsidiary of its subsidiary to the holding company. Nevertheless, the effect is exactly as the hon. Gentleman suggests. A direct relationship would be established between the holding company and what had been the subsidiary of the subsidiary. Two possibilities were mooted when the package was originally discussed: exemption from, or rollover relief for, capital gains tax under such circumstances. Exemption is preferable, but either will do. The total package will not work without one or other of the adjustments.

It is important that the Paymaster General puts something on the record about the Government's intentions. I have little foresight, but in this instance, I know that we will not reach the new clauses that we tabled, in which we advocate particular solutions. I do not place the slightest emphasis on the no doubt inadequate drafting of those new clauses nor do I expect that the Paymaster General will revise the ways and means resolution that will come before the House later today to include new Government clauses in the Bill. However, it would be a great help to everyone if we could at least have a statement from the Government that they will—should they still be in charge of the process—include a clause in the next Finance Bill to enact one or other of the effects that I describe. If, by any happy chance, we were to find ourselves sitting on the Government Benches and in charge of proceedings, there would indeed be such an adjustment.

Such an adjustment is needed, and industry needs to know that there will be one. The importance of a statement today is that it will, I hope, give some assurance to firms that need to plan around that over the coming years. I do not want to labour the point, as I hope that I have made myself clear. If the Paymaster General feels that I have left out something about our position that needs to be explained, I shall be delighted to do so.

Mr. Burnett: For clarification, when we talk about A being the top company, B company being a subsidiary of A but overseas and similarly C company, is the hon. Gentleman predicating that B is a 75 per cent. subsidiary of A and similarly C?

Mr. Letwin: It is at least that. In general, we are talking about 100 per cent. holdings. I am certainly not trying to establish an uncovenanted bonus for minority stakes or anything similar, and the Paymaster General would not expect me to do so. I hope that there is common ground between the Government and the Opposition on the principle and that we are simply dealing with an administrative delay. I await with eager anticipation the hon. Lady's statement.

Dawn Primarolo: The hon. Member for West Dorset (Mr. Letwin) referred rather kindly to the elaborate arrangements in schedule 26. For once, I shall go a little further than him by describing them as extremely complicated. He supports the principles around the move to onshore pooling, but made a specific point about the schedule's drafting in the hope that the provisions would be subject to tax law rewrite. I am sure that they will be at some stage, although that might be a long way down the track. Clearly, onshore pooling is a complicated part of tax arrangements. The United States of America, for instance, has about 1,000 pages of legislation for a system that is—dare I say it?—more complicated than ours.

Notwithstanding what the tax law rewrite will do, we intend to have further discussions with business to focus specifically on the delivery of the principles of onshore pooling and to consider the most straightforward way of delivering it. Without question, there will be further improvements in that area of tax, not to change the arrangements but to move towards clearer legislation, certainly as a first step. I was going to say that the legislation will be simplified, but that would be a misuse of the word ``simplified'' because the matter is so complicated. The hon. Gentleman will have felt that, as I certainly did, in examining schedule 26 over the weekend. It must be read in conjunction with last year's arrangements. It has to be read in conjunction with last year's arrangements. I am sure that there is room for improvement. We had intended to consult on some wider issues on company taxation in June, or whenever it may be feasible. The double tax improvements will be part of that. Like the hon. Gentleman, I should like to see a rewrite but there is room for improvement before that.

10.45 am

The Charted Institute of Taxation wrote to the Inland Revenue on 18 April and it responded on 26 April. That is the correspondence to which the hon. Gentleman referred. A follow-up query from another representative body was also received recently. The Revenue is happy that the drafting supports the interpretation that both it and business would expect: the tax that is excluded from a chain for credit relief will not endlessly recycle in the mixer cap formula to the detriment of the taxpayer. That is where to avoid triggering the cap lower down the chain the company can disclaim on what might be a smaller surplus. In the case of subsidiaries, as the hon. Gentleman rightly says, there is no reason why the cap should be triggered. It is unclear why that should be done. The double taxation arrangements meant that multinationals used offshore holding companies to avoid capital gains tax on the sale of the subsidiary. The hon. Gentleman is referring to other possibilities as a result of the changing legislation.

I need to take a little more advice before giving the hon. Gentleman a specific undertaking about rollover relief and exemption. The Government are consulting on changes to the tax on gains made by companies and disposals of substantial share holdings with a view to introducing either a deferral or an exemption. A gain made in a foreign company would be subject to foreign rather than UK tax rules. Instead of making a commitment here today, I shall flag up for the Committee the appreciation of the two points that the hon. Gentleman makes and the need for those consultations to take place in the context of changes to tax on gain.

Mr. Burnett: Will the Paymaster General address my point about the meaning of ``subsidiary'' for the purpose of the Bill? If she replies in writing, that is all well and good.

Dawn Primarolo: I am extremely grateful for the hon. Gentleman's second sentence. If I write to him, I can be sure that I have the correct clarification. I was not aware that there was a problem there but I am happy to write to him and to circulate my letter to all members of the Committee. I undertake to do that as a matter of priority so that the matter is cleared up properly.

Question put and agreed to.

Clause 79 ordered to stand part of the Bill.

Schedule 26 agreed to.

Clause 80 ordered to stand part of the Bill.

Clause 81

Life policies, life annuity contracts and capital redemption policies

Question proposed, That the clause stand part of the Bill.


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