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Session 2001- 02
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Finance Bill

Finance Bill

Column Number: 177

Standing Committee F

Tuesday 21 May 2002


[Mr. Roger Gale in the Chair]

Finance Bill

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38)

Schedule 10

Chargeable gains: taper relief: minor amendments

Amendment proposed [this day]: No. 30, in page 179, line 30, at end insert—

    'Conditions for shares to qualify as business assets

    1A (1) Paragraph 4 (conditions for shares to qualify as business assets) is amended as follows.

    (2) In sub-paragraph (2) for ''if at that time'' substitute ''if at the time it was acquired''.

    (3) In sub-paragraph (3) for ''if at that time'' substitute ''if at the time it was acquired''.

    (4) In sub-paragraph (4) for ''if at that time'' substitute ''if at the time it was acquired''.'.—[Mr. Flight]

4.30 pm

Question again proposed, That the amendment be made.

Rob Marris (Wolverhampton, South-West): On a point of order, Mr. Gale. The acoustics in this Room are absolutely appalling. I have average hearing for a man of my age and am finding it difficult to hear some hon. Members make their contributions in Committee. Talking to other members of the Committee over lunch, I found that they are having similar difficulties. I wonder whether the House could do something to improve the acoustics in the Room because the microphones are for the use of Hansard, not for boosting sound levels.

The Chairman: I am tempted to say that hon. Members who are having difficulty should have voice training. The microphones are indeed for the use of Hansard only and there are no loudspeakers in the Room. However, I heard what the hon. Gentleman said—indeed, I heard what he said very clearly. Perhaps hon. Members will remind themselves of the need slightly to project in this Room. Nevertheless the hon. Gentleman has made a serious point that I do not wish to treat frivolously, and I shall draw it to the attention of the Serjeant at Arms.

Mr. Howard Flight (Arundel and South Downs): I will bellow as far as it is possible, Mr. Gale. It crossed my mind that the point just raised might have something to do with the subject matter.

Amendment No. 30 deals with one of the injustices in the business taper rules. It also deals with the issue of those who acquired business assets before 2000 being taxed more than those who acquired them after 2000.

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We have raised the issue before, and the Government presented a pragmatic argument, but it is important to remember that perceived fairness among individuals in the workplace is an important issue that allows a company to function well and its work force to be homogenous. Those who have been at a company for the longest, have put in more over time and have had their business assets longest perceive it as unfair that they should pay more tax.

We are not going to persuade the Government and, if it were possible, we would like to put the issue to a vote, but for various reasons amendment No. 84 has remained starred. We have raised the issue, and a pragmatic answer is not sufficient given the reality of the workplace. We shall not put the matter to a vote, however, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Flight: I beg to move amendment No. 31, in page 181, line 16, leave out 'means' and insert 'includes'.

This is a technical amendment to cure a drafting defect. Schedule 10(5) defines the term ''interest in shares'', which is welcome because the acquisition or disposal of an interest in shares is often a significant taxable event. The definition in the Bill is probably too restrictive, however: it is confined to cases of co-ownership. It excludes cases in which an individual acquires a less than full interest in shares because, for example, legal title is lodged with a trustee, nominee or separate contractor under a separate contractual arrangement.

Circumstances in which that could occur include an award of shares to an employee subject to the risk of forfeiture, a case on which the Chancellor of the Exchequer introduced a new income tax regime in 1998. If that were not regarded as an interest in shares, an individual would not be regarded as having ownership for the purposes of taper relief and would be exposed to the full rate of capital gains tax upon the shares' sale. That would sabotage the thinking behind the Chancellor's reforms to the tax and penalise a large number of employees. I trust that the Economic Secretary to the Treasury will either tell me that there is a miraculous interpretation of the schedule that we have missed, or confirm that there has been a mistake in drafting, which the amendment would correct.

The Economic Secretary to the Treasury (Ruth Kelly): Welcome to the Chair this afternoon, Mr. Gale. The hon. Member for Arundel and South Downs (Mr. Flight) has moved, as he said, a technical amendment. His concern, however, is not valid and I hope that I can persuade him of that.

The definition of an interest in shares that will be introduced into the taper relief rules by schedule 10 corresponds exactly to that which applies to the new substantial shareholdings provisions, and does not represent any change for taper relief. It focuses on an interest in shares that people have if they own them together with someone else, which is exactly what we had in mind when we framed the taper rule. The reason why we have included a definition in the substantial

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shareholdings provisions is because we were urged to do so by representative bodies that commented on the draft legislation that was published at the time of the pre-Budget report—they wanted clarity, and we have given it to them. Schedule 10 provides the same clarity for taper relief.

The hon. Gentleman suggested that a person who holds shares subject to forfeiture holds an interest in those shares as distinct from holding the shares themselves. The Inland Revenue's view is clear: for tax purposes the taxpayer holds the shares, and what matters is the beneficial ownership of the shares. The amendment would create uncertainty in an area in which we are bringing clarity, as it would leave wide open the question of what constitutes an interest in shares for taper relief. On those grounds, I suggest that the Committee rejects the amendment. I hope that the hon. Gentleman accepts my points and withdraws it.

Mr. Flight: I am delighted to be advised that the concerns that our tax counsel raised about drafting have been covered. The second point is slightly grey on the area of law, but, if I understand correctly, it is covered by an Inland Revenue statement of practice. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 10 agreed to.

Clause 47

Use of trading losses against chargeable gains

Mr. Flight: I beg to move amendment No. 12, in page 32, line 19, leave out from 'relief)' to end of line 21 and insert—

    'for ''disregarding section 3(1) of the Taxation of Chargeable Gains Act 1992 and the effect of this section'' substitute ''disregarding the effect of this section and either section 2A (taper relief) or section 3(1) (annual exempt amount) of the Taxation of Chargeable Gains Act 1992 as the person elects for the year of assessment in question.''.'.

The clause is intended to allow individuals to benefit from both taper relief and trading losses in the same year. The points that I shall make may be slightly convoluted.

As we understand the clause, the choice that will be presented to people for the early-stage operations of disposing of business assets could, unintentionally, be unattractive. Under section 2 of the Taxation of Chargeable Gains Act 1992, taper relief is given to reduce capital gains on business assets. It works to reduce taxable gains through a taper that depends on the length of the ownership of the business asset. It is available if the total chargeable gains for the year exceed current-year and brought-forward capital losses and the taper is applied to the net gain after deducting those capital losses. Section 72 of the Finance Act 1991 allows individuals to set trading losses against capital gains by treating the maximum amount of loss as a capital loss. The maximum amount is currently the net capital gain after taper relief but before the annual exemption. It should be noted that

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as section 72 of the 1991 Act treats a trading loss as a capital loss, taper relief is applied to the net gain after setting off the trading loss.

The interaction of the two measures seems to mean that an individual could have trading losses in excess of their gross capital gains but, because of the way in which the taper works, could not reduce their capital gains to nil. The Bill increases the maximum amount of trading loss that can be set against the capital gain to the gross gain before taper relief. That in turn allows individuals with trading losses in excess of their capital gains to reduce the gains to nil. It also means that the benefit of taper relief is lost. That could penalise sole traders who need to realise funds by selling a business asset and use the cash raised to turn the unprofitable business around. The tax saved by each £10,000 of trading loss used in this way is £1,000 for assets held for more than two years, but £4,000 of tax could be saved if the loss were used against trading income.

The amendment would give taxpayers the option to elect to lose either taper relief or the annual allowance. That may sound an odd idea, but it might force the Government to explain why taxpayers must lose both. Although it would be relevant only in specific circumstances, the provision is a stealth tax nasty, although I believe that it was intended to be helpful. The Institute of Directors and the Chartered Institute of Taxation have also noted the anomaly.

Ruth Kelly: We have accepted that, under existing rules, the determination of the amount of trading losses that can be deducted from a gain is not as generous as it should be. The maximum amount is restricted to an amount equal to the gain that would be chargeable to tax after taking taper relief into account. The purpose of the provision is to correct that anomaly. It introduces a modest change that will increase the amount of trading losses that can be set against capital gains. As a result, trading losses can be deducted from a gain if they do not in total exceed it. We have been encouraged to make the change by representative groups and we would, rightly, be criticised if we allowed the anomaly to be perpetuated.

Amendment No. 12 would introduce a change that was neither simple nor appropriate. It would allow a person to elect that trading losses be set against gains up to an amount equal to their total gains before the annual exempt amount was deducted. If such an election were made, the amount of the losses set off would be restricted to the total gains after taper relief had been applied, thus negating the effect of the clause.

The amendment would also provide taxpayers with the choice of making an alternative election: to set trading losses against gains up to an amount equal to the total gains before they are tapered. If such an election were made, the total amount of losses set off would be restricted to the total gains after the annual exempt amount had been deducted. The purpose of that alternative election is to allow a claimant to elect that their trading losses be used to reduce gains only to the level of the annual exempt amount and not, as now, to nil.

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We believe that it is right in principle that the amount of trading losses capable of being set against gains is not restricted by reference to the tapered gain or to the gain after the annual exempt amount has been deducted. Allowing trading losses to reduce capital gains down to the level of the annual exempt amount would also be inconsistent with the treatment of capital losses that arise in the same year as chargeable gains. The rule is that such losses are set off against gains to arrive at a net figure, without taking the annual exempt amount into account. The general principle that the amount of losses that can be deducted is not restricted by allowances applies equally to the taxation of income. Reliefs for trading losses, management expenses and so on are given by way of deduction from total income. There is no case for making an exception for setting off trading losses against capital gains.

4.45 pm

Amendment No. 12 would have a further effect: most, if not all, claimants would have to make an election to ensure that they did not lose out as a result of the anomaly in the current rules. Therefore, the amendment would not be a simplification; instead, it would add significant complexity to the system.The elective element in clause 47 is merely transitional. If the new method of deduction is of benefit to people incurring trading losses in the tax years 2002-03 or 2003-04, they may elect for it to apply. However, from the tax year 2004-05 onwards, the new rules will apply to all relevant claims. Clause 47 makes the rules for trading loss relief operate in a simpler and fairer way.


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