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John Healey: The new clause deals with capital allowances for expensive cars. This is, as the hon. Member for Arundel and South Downs (Mr. Flight) has said, a misnomer now, because cars costing more than £12,000 are not generally considered expensive these days, although I still think so. More significantly, the term is not used in the rewritten Capital Allowances Act 2001. It is, therefore, something of a misnomer and, as the hon. Gentleman said, the provision is somewhat complex to administer.

We have a developing strategy for the use of fiscal and economic instruments to encourage the use of cleaner, more environmentally friendly cars. The rules for taxing

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employee company cars and fuel, vehicle excise duty and the new capital allowances for cars with low emissions of carbon dioxide all work within this framework. Raising the £12,000 limit for cars generally would work against this environmental aim because it could benefit the purchasers and users of larger and more expensive cars, which tend to be more environmentally polluting. Encouraging investment in such cars would be both expensive and counter-productive to our environmental aims.

I am aware of the submissions made by the Chartered Institute of Taxation. My right hon. Friend met representatives of the institute earlier this year, and we have invited them to submit the detailed workings that led them to suggest that there may be a gain to the Treasury from this measure. Our calculations suggest that the cost to the Exchequer of the proposals to raise the limit would be significant.

We are aware of the concerns that some businesses have about the cost of administering the rules. This is a hardy perennial in Budget representations. However, as many businesses recognise, there are no clear alternatives that do not raise other significant issues that are difficult to deal with. So, while I recognise that the rules can add significantly to the administration of businesses, there are no easy solutions that fit with our environmental aims, avoid introducing perverse incentives and provide good value for money for the country and the Exchequer.

I can tell the hon. Gentleman, however, that the Inland Revenue and my colleagues and I are keeping—and will keep—these rules under close review. We will consider suggestions for simplifying them in ways that do not compromise our other objectives, but his new clause is not compatible with those objectives. If the hon. Gentleman presses the matter to a vote, I will have to advise the House to reject it.

Mr. Flight: This is not the time of night to spend more time on this matter. The new clause was intended to be dealt with in Committee, but time ran out. The CIOT feels that it has an argument, and the Minister has made it clear that the door is open for dialogue. I do not think that the proposal necessarily conflicts with the Government's environmental objectives, and I hope that this brief discussion will enable us to begin the process of considering how a sensible simplification might be administered. On that basis, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

New Clause 12

Investment companies and trading companies

'.—(1) Schedule A1 to the Taxation of Chargeable Gains Act 1992 shall be amended as follows—
(2) In paragraph 6, subparagraphs (1)(a), (1A), (2)(a), (2A), (3)(a), (4), (5) and (6) shall cease to have effect.
(3) In paragraph 6(7), the words in brackets shall cease to have effect.
(4) In paragraph 22(1), the definitions of "trade", "trading company" and "trading group" shall cease to have effect.
(5) For paragraph 6A there shall be substituted—
"6A(1) A company does not rank as a qualifying company for the purposes of paragraph 6 by reference to an individual at any time when it is his Private Investment Company;

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(2) A Private Investment Company is a company as a whole, or substantially the whole, of whose share capital is held by an individual or persons connected with him;
(3) A company is not a Private Investment Company if, notwithstanding the previous subparagraph, it has five or more full time employees other than the individual concerned in subparagraph (1)."
(6) This section shall have effect from 6th April 2002.'.—[Mr. Flight.]

Brought up, and read the First time.

11.45 pm

Mr. Flight: I beg to move, That the clause be read a Second time.

The clause is another Chartered Institute of Taxation proposal, which raises an issue of rather greater fundamental importance. For many years, the tax law has contained an in-built and assumed bias against investment companies. There are many provisions in which privileges given to trading companies are not available to investment companies. In simple terms, the tax code operates on the basis of trading: good; investment: bad. The distinction is much less appropriate now than it may have been in the past.

Paul Flynn (Newport, West): It may be helpful to the House if the hon. Gentleman explained to us whether he intends to withdraw all the new clauses that he is moving, and which he admits are more suitable for discussion in Committee than in the House. Is his refusal to press them to a Division intended to disguise the fact that there are only two Tories in the Chamber?

Mr. Flight: I am disappointed that such an able Member of Parliament should raise an entirely spurious point. The clauses were intended to be dealt with in Committee. The Committee's obsession with some other territory—I forget what, specifically—meant that we ran out of time. They are part of an agenda to try to simplify our tax system. It is right and proper that they should be put on the record. I assure the hon. Gentleman that I would prefer to be home in my bed and doing my duty, so I shall waste no more time.

Rob Marris: Having driven home in a big car?

Mr. Flight: No, a little car—a little Clio.

The distinction between investment and trading is out of date, and the clause seeks to probe the subject in one specific area, rather than attempting to change the whole tax system. Specifically, it focuses on the distinction within the capital gains tax tapering relief rules. That has been chosen as there have already been changes in the legislation in that area.

There is a much better taper for business assets than for non-business assets. Business assets are carefully defined and include trading activities, investments in unquoted trading companies and employee investments in their employing company in all cases. In respect of the latter point, there has been a modest development in the investment trading rules, with the changes in the Finance Act 2001 to extend employee shareholding to situations where the individual works for an investment company. It is suggested that that shows that the Revenue and the Government have recognised the underlying point of principle that we raise.

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Surely the focus now should be on active companies versus passive companies. In such a situation, there may well be a legitimate reason to protect the Exchequer against manoeuvres by individuals holding private investments through passive company corporate shells. It is suggested that all companies should qualify for the enhanced taper relief that is on offer for trading companies, but there should be a restriction against private investment companies.

The definition in the clause is an attempt to prevent the private investor from trying to manipulate the tax rules, although even here there would be an argument for not preventing such a person taking advantage, if they were so minded. It would mean that any investments held through a corporate shell would pay capital gains tax twice—within the company and again when the individual sells the shares in the company—rather than once for a direct holding. Any advantage gained through the increased tapering at one level would be negated to all intents and purposes at other levels.

The impact of the change would be limited. It would simply open up to the higher taper relief a number of investments by individuals in unquoted investment companies that were of a significant size. The crux of the matter and the reason for the clause is to allow a probe into the rationale for the continuing distinction. In this day and age, surely the aim should be to encourage all active businesses, and if there is a need to discriminate against certain businesses, to do that in as limited a way as possible.

Ruth Kelly: I am afraid that I cannot support new clause 12. It aims to allow shares and securities in non-trading companies to qualify as business assets for capital gains tax taper relief on the same footing as shares and securities in trading companies. That would mean that shares in an unlisted non-trading company, such as a property investment company, would qualify for business assets taper relief. There would be no distinction between trading and non-trading companies.

I should remind the House why we have this distinction between trading and non-trading companies for taper relief. Business asset taper relief supports productivity improvements by focusing on trading companies. There is a long-standing view that productivity gains are likely to be greater in trading companies, such as manufacturers, than in investment companies, such as property landlords.

That is not to say that the Government do not recognise that a range of investment companies could contribute positively to the UK economy. That is why we announced in the Budget that there would be consultation on further reforms of the corporate tax system, including a review of the scope for greater alignment between the treatment of investment and trading companies. A consultation document will be issued later in the summer. The outcome of that review will have implications for other parts of the tax system in addition to how companies are taxed. One such area could be the capital gains tax treatment of shares in companies.

That is also why we announced in the Budget that we shall continue to review the case for further changes to the non-business asset capital gains tax regime for taper relief. However, we need to be persuaded of the case for change in those areas by evidence of economic benefit and value for money. Without evidence, the new clause seems premature.

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Until we know the outcome of the two reviews that we are carrying out, we believe that the distinction between trading and non-trading companies should remain as it is for taper relief purposes. The introduction of new clause 12 would create fresh tensions at the margins by moving the boundary between qualifying and non-qualifying companies. Therefore, I must ask the House to reject the new clause.

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