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Standing Committee F
Tuesday 21 May 2002
[Mr. Joe Benton in the Chair]
(Except clauses 4, 19, 23, 26 to 29, 87 to 92,
131 and 134 and schedules 1, 5 and 38)
Treatment of deductions from
payments to sub-contractors
Question proposed [16 May], That the clause stand part of the Bill.
Question again proposed.
Mr. Howard Flight (Arundel and South Downs): We and the industry broadly welcome this clause, which provides a cash flow advantage and in part resolves some long-standing problems, but I want to raise two issues, one of which appears as a starred amendment.
First, in parallel territory in the context of IR35, a similar problem was dealt with by ESCC32 for the tax year 2000–01 and its application to subsequent years was to be reviewed. I should be grateful if the Government would confirm that the measure will apply to 2001–02.
Secondly, clause 40 does not provide for tax deducted from payments under the construction industry scheme to reduce PAYE liability to account for tax on payments under that scheme made by an unincorporated taxpayer. Would it not be appropriate to put incorporated and unincorporated organisations on the same basis under the regime?
Although the provision is welcome, the construction industry scheme remains a problem because the Inland Revenue does not always enforce or police it effectively. There are minor improvements in the Bill, but there is a long way to go. Non-compliance and slack administration have the effect that some businesses may be hit hard while others are not noted. Are the Government considering resources to enable the scheme to be more efficient and policed more effectively? If not, is it worth continuing with it?
The Paymaster General (Dawn Primarolo): Good morning, Mr. Benton.
I shall deal first with the general comments of the hon. Member for Arundel and South Downs (Mr. Flight) about the construction industry scheme. The clause applies only to that scheme. The Government are between the devil and the deep blue sea. The hon. Gentleman's right hon. Friend the Member for Fylde (Mr. Jack)—I think I can call him my right hon. Friend as well—was in the same difficult position as me. People argued that they wanted the scheme to be more tightly drawn and administered. However, when the compliance regime and its enforcement appeared to restrict activity in which they might want to engage, they came back with the argument that it is controlled
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too tightly and is unfair on the industry, which undermines operations.
In response to demands from industry, the previous Government consulted, and it was agreed that the construction scheme would be put in place. Once it was put in place, people started to complain about it—what a surprise. They did not notice that that was going to happen, or they had not appreciated that it was going to happen. In the middle, the Inland Revenue struggles to ensure that it collects the proper amount of tax from the taxpayer.
My approach now, working with the industry and the trade unions, is to review. With representatives of all the organisations that participate in the construction industry, we have undertaken a fundamental reassessment of whether the current scheme, which has to be amended each year, is based on sound principles. One of the big issues that has come up has been whether we could move to electronic issue of the certificates. Industry and the Government are quite keen to achieve that. We are looking closely at how we are taking forward the scheme with the construction industry. I do not want to rush in and change the scheme, so I am taking the approach of stabilising it and making adjustments where it is sensible to do so. However, behind that, with the industry, trade bodies and the trade unions, I am considering the whole operation of the scheme very carefully.
The issuing of a certificate does not mean that a person is self-employed; it simply reflects how they should pay tax and whether a deduction should be made. I am more than happy, as we move to more detailed consultation, to ensure that the hon. Member for Arundel and South Downs is kept informed of that and is able to participate in it. The problem with the construction industry is that ''one size fits all'' does not work. It is a complex industry and we need to fine tune. I hope that that is helpful to the hon. Gentleman in showing the Government's thinking on how we are going to stabilise the operational scheme and ensure that everyone is happy with it.
Extra-statutory concession A32 applies in 2001–02. The hon. Member for Arundel and South Downs asked a question that was really about sole traders and partners, and their scope in the legislation. That brings us back to the point that I made about the scheme in general. We have sole traders, companies, individuals and partnerships. Our tax system treats each in a slightly different way. If we said that all those working in the construction industry had to be treated in the same way because they were in the same industry, we would have some difficulty. As I understand it, the hon. Gentleman was probing to establish why we do not bring partners and sole traders into the scope of the clause. We do not think that it is necessary to bring them in, and the feedback from the industry to date shows that the 18 per cent. deduction rate is about right for sole traders and partners. In practice, that is close to their final tax liability. I am not saying that some may have to pay slightly more, or less, but we think, as does the industry in our consultations, that overall it is a reasonable approximation. However, as with all tax rates and thresholds, this must be kept
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under review. If circumstances altered, we would return to the matter. A theoretical problem is being advanced, but we have no information—nobody can give us any, even though we have asked for it—on whether it is a real problem that we should put right. I want to wait until the situation is more than anecdotal because of the issues it creates elsewhere in the scheme.
The 18 per cent. figure is about right for sole traders and partners. However, that was not the case for companies that paid under deductions, the majority of which faced serious cash-flow problems because some or all of the deductions that they suffered were due to be repaid to them—they paid us, we kept it and then we paid it back. The clause deals with real issues for companies. We have had no indication that a problem exists for partnerships or sole traders, but if one emerges over the next year, the Government will return to the matter. Rather than tinker with the scheme every year, we are yet again working with the industry to establish a scheme with which everyone is happy and which works well.
In the construction industry there is the problem of bogus self-employment. The Inland Revenue pursues compliance, but that sometimes becomes difficult because sub-contractors are chased through sub-contractors, and companies are not always able, or willing, to disclose information that we need.
I hope that I have explained to the hon. Member for Arundel and South Downs the main points relating to his amendment that was not selected. I take it that it would have been a probing amendment. I hope that I have allayed his fears for now.
Mr. Flight: I thank the Paymaster General for her helpful reply.
Question put and agreed to.
Clause 40 ordered to stand part of the Bill.
Reallocation within group of gain or
loss accruing under section 179
Question proposed, That the clause stand part of the Bill.
The Chairman: With this it will be convenient to discuss new clause 4—Company ceasing to be a member of a group—
Mr. Flight: Clause 41 contains measures relating to reforms for which businesses have been calling for some time, and the Institute of Directors has welcomed them. The clause improves flexibility.
Section 179 of the Taxation of Chargeable Gains Act 1992 was introduced to combat the ''envelope scheme'', in which groups disposed of an asset pregnant with capital gain by transferring it to an intra-group, or to a special-purpose company, on a no-gains-no-loss basis, and then sold shares, rather than
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the asset, in that company. The scheme was organised so that the capital gain from the sale of shares in the special-purpose company was lower than the gain that would have come from the sale of the assets in isolation. Under the section, the transfer of the original asset intra-group is taxed if the special-purpose company leaves the capital gains group within six years of the asset's transfer. The resulting de-grouping provision was inflexible and permitted no roll-over or ability to use capital losses elsewhere in the group. This clause and clause 42 seek to address those problems. However, six years is a long time to wait, and many straightforward commercial transactions are caught by the period. That other main criticism of the section has not been addressed.
The new stamp duty anti-avoidance clauses that we shall discuss later catch similar transactions but use a two-year time limit. Therefore, new clause 4 proposes a two-year time period. It has the support of the Chartered Institute of Taxation, which takes the view that it would be sufficient to counteract envelope schemes, so we hope that the Government will consider sympathetically putting the time limit in line with the stamp duty arrangements.
The Economic Secretary to the Treasury (Ruth Kelly): Good morning, Mr. Benton. It is a pleasure to have you in the Chair this morning.
I thank the hon. Member for Arundel and South Downs for his comments, which were made in a very constructive way, as usual. He recognised the fact that businesses have been calling for the reforms for some time, that they welcome the changes and that the changes will provide useful flexibility to businesses when restructuring.
The hon. Gentleman very ably explained the purpose of the original de-grouping charge, which is a long-standing anti-avoidance provision. It prevents tax from being lost when a company leaves a group, taking with it an asset that has been transferred to it tax free from another member of the group. The hon. Gentleman gave the example of a special-purpose vehicle being set up and then sold.
The de-grouping charge is triggered if the transferee company leaves the group within six years of the asset transfer. It operates by reference to a six-year period in order to strike an equitable balance between two competing considerations, which I shall outline. I hope that I can reassure the hon. Gentleman that reducing the period to two years is not a sensible manner in which to proceed.
The measure protects the Exchequer against a form of tax avoidance that is not time limited. There is a good case for saying that the provision should not be time limited at all and, as a matter of principle, it is right that groups should not be able to escape tax on gains by transferring assets to companies that then leave the group. In that regard, the tax, which is a tax on gains, is quite different from the stamp duty charge, which is a transaction tax. Therefore, there is a different issue in principle as to how the tax should be collected and the appropriate period in which to do it.
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The other competing consideration that we must take into account is that, because companies and groups must maintain records of their transactions in order to comply with the provision, an unreasonable burden would be imposed if there were no time limit. Six years has long been seen as a relatively reasonable compromise. It is consistent with the period over which companies must keep records relating to their tax assessments, and we are not persuaded by the argument that it causes major compliance difficulties.
As the hon. Gentleman said, clause 41 and clause 42, which we shall discuss shortly, make significant changes to the de-grouping charge. Clause 41 will allow a gain or loss arising when a company leaves a group to be reallocated elsewhere within the group, thus creating greater flexibility in offsetting losses and gains. Clause 42 enables gains that arise on business assets to qualify for roll-over relief if the conditions for such relief are otherwise met.
As the hon. Gentleman said, businesses wanted the changes, which were widely consulted on and widely welcomed. They will stop the de-grouping charge being an impediment when companies wish to restructure for commercial reasons and are much more important to business than any potential change to the six-year rule. We are not persuaded that further relaxation of the de-grouping charge is either necessary or desirable, so I urge the Committee not to accept the hon. Gentleman's new clause.