Ruth Kelly: These rules are certainly formidably complicated. What I would say in mitigation is that they have been around for a long time. The complexity surrounding them is not gratuitous, but arises from a policy desire to provide relief from a tax charge in certain circumstances. If the rules were not in place, there would be a charge to tax on any gain arising on the straightforward exchange of shares when one company was taken over by another. I think that the rules are necessary.
The point that the hon. Member for Arundel and South Downs raised about Deloitte and Touche is covered in the detailed guidance that is being set out by the Revenue. I do not accept that the clause is in any way distorting commercial behaviour. Share exchanges and other forms of company reconstruction will normally continue to be tax neutral for corporation tax purposes at the time of the event. If one holding of shares were treated as disposed of for tax purposes and another were treated as acquired, it seems wrong that the new holding should inherit the history of the original shares. That would be appropriate only if the new holding were
Column Number: 158standing in the shoes of the original holding. On those grounds, I would continue to urge the Committee to reject the amendment, but perhaps the hon. Gentleman will consider withdrawing it.
Mr. Flight: I think that the Economic Secretary has satisfied me that where shares stand in shoes, they will qualify for the new exemption. The intent of the amendment was to probe that matter and, on that understanding, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Mr. Flight: I beg to move amendment No. 38, in page 169, line 41, at end insert—
40 (1) Paragraphs 1, 2 or 3 of this Schedule shall be deemed to have effect (and the requirements mentioned therein shall be deemed to have been met), in relation to an investing company where the Board have, on the application of the investing company, notified the investing company concerned that the Board are satisfied that the exemptions in paragraphs 1, 2 or 3 of this Schedule apply to that investing company and that the requirements mentioned in paragraphs 1, 2 or 3 have been met.
(2) Any application under sub-paragraph (1) above shall be in writing and shall contain particulars of the operations or transactions that are to be effected by the applicant and the Board may, within 30 days of receipt of the application or of any further particulars previously required under this sub-paragraph, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application.
(3) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give notice under sub-paragraph (2) above, within 30 days of the notice being complied with.
(4) If the Board notify the applicant that they are not satisfied as mentioned in sub-paragraph (1) above or do not notify their decision to the applicant within the time required by sub-paragraph (3) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under sub-paragraph (2) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of sub-paragraph (1) above as if it were a notification by the Board.
(5) If any particulars furnished under this paragraph do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in sub-paragraph (1) above shall be void.'.
Amendment No. 38 would implement arrangements for a clearance procedure, to which I referred earlier. Before I comment on that, I must point out that one effect of clause 43 would be to encourage vendors to dispose of shares. However, the new intellectual property rules in clause 48 encourage purchasers to acquire assets. The Bill contains a contradiction that needs to be addressed.
One of the main criticisms implicit in the comments about the lack of clarity is the need for a clearance process. Without such a process, groups will be expected to dispose of shares, which may have large capital gains, without knowing explicitly whether they will qualify for the exemption. Even after the more detailed statement of practice to which the Economic Secretary referred, a statutory clearance procedure such as that suggested in the amendment would
Column Number: 159provide the key element of certainty and would be welcomed by businesses.
The statement of practice may be sufficient to persuade the various tax lawyers and accountants that a clearance procedure is not necessary, but as the schedule stands, Conservative Members have concluded that the only way round the lack of clarity is to put in a clearance procedure.
Mr. Burnett: I want only to add to the points made by the hon. Member for Arundel and South Downs. Business needs certainty and that should be a principle of the tax system. I question whether the proposed statement of practice will make allowance for all the myriad circumstances that will arise in any proposed transaction for which exemption is sought under the provisions. It is therefore entirely reasonable that there should be a short and swift clearance procedure and I endorse the proposal.
Ruth Kelly: The proposal essentially concerns a formal clearance mechanism for the Inland Revenue.
Mr. Flight: Statutory.
Ruth Kelly: Statutory. For practical reasons, I am going to argue that it would not be appropriate for the Inland Revenue to provide such a statutory clearance mechanism, and if businesses looked at it carefully they would not want it for reasons that I shall explain.
We have already had a substantial exchange this morning about whether the legislation is particularly unclear and whether additional certainty can be generated by the Inland Revenue's guidance. Although I am not going to repeat that debate, I hope that that guidance will allay the concerns that have been expressed. The amendment models the clearing mechanism on existing clearing mechanisms, but such a formal statutory clearing mechanism would impose substantial costs.
Mr. Michael Jack (Fylde): So that we might have that added clarity, will the Economic Secretary give us one or two examples of the existing mechanisms to which she referred?
Ruth Kelly: I shall certainly expand on the existing clearing mechanisms and how they operate, but I want to say a few words about why such a mechanism would not be appropriate. I shall come back to the right hon. Gentleman's point in due course.
As I said, the provisions to accept gains and losses on substantial shareholdings have been subject to extensive consultation. The regime has been widely welcomed for providing groups of companies with the flexibility to restructure rapidly in response to emerging global opportunities without being constrained by the tax system. Let us consider the resource implications of having a statutory clearing mechanism for both business and the Revenue. The existing clearance procedures are targeted at transactions such as company reconstructions, demergers, the purchase by a company of its own shares, and provisions that cancel tax advantages arising from certain transactions in securities. It is well known that many applications for clearance are made simply because the facility exists and not because of any real uncertainty in the legislation. The Revenue
Column Number: 160knows from talking to accountants that many applications are made at the insistence of clients, even when the accountant is certain of the tax position. As a result, a very small percentage of applications are refused clearance.
The number of clearance applications is already large. There are, for example, more than 4,000 a year on company reconstructions alone. Disposal of a shareholding is a much more common transaction than a company reconstruction. The number of disposals of substantial shareholdings to which the exemption could apply is therefore likely to be much larger and the resources that would have to be devoted to clearance applications, both by companies and their advisers and by the Inland Revenue, would make a clearance procedure an impractical proposition. The costs would be significant, even though, in the great majority of cases, there would be no doubt as to whether the exemption applied.
My second reason for rejecting the amendment is that it would be difficult to operate the statutory clearance procedure satisfactorily. Many of the conditions for exemption apply either immediately before or immediately after the time of the disposal. A clearance application, by definition, would be made in advance of the disposal taking place and would have to be considered on the basis of the company's expectation of the facts at the time of the disposal.
In some cases, it would be difficult to determine whether the conditions were met within the context of a formal clearance application when there were strict time limits. The position might change and the facts might be different when the transaction took place. There would be a doubling up of work to consider the clearance application and then to check whether the conditions were actually satisfied after the disposal had taken place. There could be void clearances even when the facts were fully and accurately stated when the application was made.
In response to the hon. Member for Torridge and West Devon, there are less formal and more satisfactory and appropriate ways of seeking guidance in such cases. The most appropriate way might be for companies and their tax advisers and accountants who are in genuine doubt about whether a provision will apply to discuss the matter with the tax inspector who deals with accounts criteria, such as whether the company is a trading company for purposes of capital gains tax taper relief. For that relief, the company's inspector is prepared to enter into correspondence in cases where there is uncertainty and there is no reason why such an arrangement should not apply to the substantial shareholdings regime.
For those essentially practical reasons, it is not in the interests of business to have a formal statutory clearing mechanism. The more informal approach, with advice being taken from the inspector, will work more appropriately and minimise costs.
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