Finance Bill

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Mr. Flight: I hope that the Minister was saying diplomatically that the Revenue would be happy to operate an informal clearance procedure as opposed to a statutory procedure. It is common ground that even

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after the detailed code of practice there will be grey areas because the territory is so complicated. When dealing with companies, the Revenue has an excellent record of being practical, so I am just about content with an informal procedure. Will the hon. Lady confirm that that is what she was saying? If so, I shall withdraw the amendment, but if not, we may want to return to the matter on Report.

Ruth Kelly: To clear up the point about the sort of advice that the Revenue is able to give, in accordance with existing code of practice 10, the Revenue will advise taxpayers of its view on the application of the law to a particular transaction if there is genuine uncertainty as to the interpretation of the law, provided that the full facts and circumstances have been laid out for the Revenue and the relevant law is contained in a recent Finance Act. In addition, the Revenue will give post-transaction rulings advising on the tax implications of the transaction once it has been carried out.

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In practice, therefore, there is an arrangement that will work well in the case of substantial shareholdings, that will minimise the burden on businesses and that will, in due course, be welcomed by business as a much more practical way of proceeding on the issues.

Mr. Flight: I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Eighth schedule to the Bill.

Mr. Burnett: Now is the time for me to probe one or two of the philosophical points behind the schedule; I may be over-egging it. The provision is welcome—no one doubts that—but it would not be churlish to ask the Economic Secretary to tackle a further matter that arises from the schedule and clause 43. It appears to some that the Government's philosophy or underlying assumption when they introduced the provision was that trading companies are good and investment companies carrying on bona fide commercial investments are bad. In this day and age, such a view is mistaken. It is a dated assumption that virtually every large holding company quoted on the stock market is an investment company.

Provisions in the Bill define trading groups, into which most companies will probably fall. However, I draw the Economic Secretary's attention to one or two obvious points. Investment companies employ people who pay tax, often at very high rates, and they should be encouraged. We want to retain investment companies in this country and encourage new investment companies to locate here. The measure is wholly welcome for trading companies and groups.

I ask the hon. Lady to deal with this fundamental point. Investment is the sine qua non to all business and commercial activities and it is absolutely vital to our economy. In a nutshell, my argument is that the distinction is now completely dated and I hope that the Economic Secretary will tell us that the Government

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are reconsidering their views, which are not really relevant to a modern, thriving and growing economy. We must encourage investment companies. I am not talking about companies that are involved in tax avoidance and so on, but about investment companies that carry on bona fide commercial investments.

Mr. Flight: I second the hon. Gentleman's comments. Indeed, the Chartered Institute of Taxation raised the same matter. It thinks that the distinction between trading and investment companies is inappropriate in the context. Furthermore, it is unsatisfactory that the disposing group has to be a qualifying trading company, both before and after the disposal of shares in a trading company, which appears to have been carried over from the initial consultation process when a deferred system rather than exemption was proposed. As I understand it, that could lead to the extraordinary result that a UK holding company would be exempt from corporation tax on all disposals except the last one, putting the UK at a disadvantage, particularly against Germany and the Netherlands.

Thirdly, I understand that there could be anomalies between the clause and the proposed legislation on derivatives. I would flag that up for further discussion later in the Bill. Finally, can the Government be urged to include a trading purpose option in addition to the minimum holding?

Ruth Kelly: I thank hon. Members for their comments on the schedule. I certainly enjoyed the description by the hon. Member for Torridge and West Devon of his vision of how the British economy might develop in the next 10 or 20 years. To understand the terms of the provision and its restriction to trading companies, it is important to grasp how it arose. When consultation on the relief for substantial shareholdings began, it was in the context of a deferral relief—the disposal proceeds would then have to be reinvested in qualifying trading assets. The exemption that we are introducing contains no reinvestment requirement.

Mr. Burnett: Will the hon. Lady give way?

Ruth Kelly: Will the hon. Gentleman let me continue for a moment? We sought to maximise the likelihood that the disposal proceeds would be used in the way that contributed most to our fundamental policy objective of increasing UK productivity. The trading provisions are designed to achieve that.

Our tax system already distinguishes in many ways between trading and investment activities, and the holding and management of property is regarded for such purposes as an investment activity. However, there is nothing to prevent a property company that is a member of a trading group from benefiting from the exemption if it disposes of shares in a trading company, a holding company or a trading group or sub-group. Property companies will not necessarily lose out as a result of the changes.

I can tell the hon. Member for Arundel and South Downs that we published in the Budget press release the shape of future consultation on the measures. Perhaps I should not go into all the details, but we said that one of the issues that the consultation would

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review was the scope for greater alignment between the treatment of investing companies and that of trading companies. I am not going to pre-empt the review or its conclusions, but that will be considered. I am sure that the hon. Member for Torridge and West Devon will make representations to the review, as will other interested parties.

On trading purpose other than activity, the purpose for a group of activities is difficult to operate; activity is an easier concept. In practice, purpose can be evidenced only by actual activity. I do not believe that there is a significant difference between the two. In conclusion, I hope that all Committee members will be able to support the schedule.

Mr. Burnett: The Economic Secretary is right that distinctions, often artificial, between bona fide investment companies and trading companies riddle our tax system. I welcome the fact that the matter will be reviewed, and hope that the review will take into account the points made by Opposition Members, especially those that relate to enhancing our economy and the attraction of the United Kingdom as a first-class trading location.

Question put and agreed to.

Schedule 8 agreed to.

Clause 44

Share exchanges and company reconstructions

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

Mr. Flight: The clarification definitions that the clause covers apply only for CGT purposes, which could lead to anomalies between CGT and other taxes, stamp duty in particular. I flag that up for when we come to the relevant clause. The Chartered Institute of Taxation says that it would like confirmation that the clarification provisions are not intended to introduce any substantive change in the law.

Ruth Kelly: The clause and schedule 9 reform the capital gains rules for share exchanges, takeovers and other forms of company reconstruction. It is important for businesses and investors alike that the rules should cater for all the situations that may arise in practice and that they should be on a firm statutory footing. The changes that we are making will do just that.

The rules will prevent tax on capital gains standing in the way of commercial reconstructions, rolling over any gain that would otherwise arise on the reconstruction. The current rules, which go back to the introduction of CGT in 1965, are not entirely satisfactory. There has always been some uncertainty about what types of corporate reconstruction qualify as a scheme of reconstruction, because there has been no formal definition of that expression. People have had to rely on judgments and court cases, which stretch back to the early years of the last century and inevitably reflect the different business world of that era. Over the years, the Inland Revenue has filled the gap to some extent by publicising what it regards schemes of reconstruction to be.

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Last year, a court decision established that some types of reconstruction that the Revenue had accepted as schemes of reconstruction did not qualify as such in law, which caused unease in the business community. The decision prevented a variety of arrangements from qualifying as schemes of reconstruction, although there was no policy reason why they should not benefit from favourable tax treatment. Therefore, we are introducing new provisions to restore the position to what it was before the court decision. They put an end to the uncertainty that surrounds qualification for schemes of reconstruction by defining it in the Bill. We have also taken the opportunity to extend the scope of the provisions for share exchanges to companies that do not have share capital by treating the interests of members as though they were shares. The provisions will now apply to exchanges involving companies limited by guarantee, for example.

The hon. Member for Arundel and South Downs asked about the interaction of the provisions with the stamp duty regime. CGT and stamp duty are entirely different taxes, with different aims and separate rules. I can assure him, however, that modernisation of the statutory regime, to which we shall come in due course and which was announced in the Budget, provides an opportunity to reconsider the stamp duty rules for schemes of reconstruction. Consideration of the reconstruction reliefs is included in the modernising stamp duty consultation process, which is intended to produce new legislation in next year's Finance Bill. If any anomalies arise, we shall have an opportunity to take them into account.

For those reasons, I believe that the clause and schedule 9 will be widely welcomed by business for the certainty and coverage that they provide.

Question put and agreed to.

Clause 44 ordered to stand part of the Bill.

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