Finance Bill

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Clause 64

Postponement of change to mark-to-market in certain cases

Mr. Flight: I beg to move amendment No. 112, page 41, line 43, leave out '2002' and insert '2003'.

The amendment is probing and asks whether the Government are satisfied from their discussion with the industry that their proposed starting date will work satisfactorily. The clause gives help to insurance companies required to move to a mark-to-market basis in relation to the profits and losses arising on their portfolio investments. For accounting periods ending on or after 31 December 1998, insurance companies have been required to account for the portfolio investments on a mark-to-market basis—that is, investments are recognised in the accounts on their market value, which is duly adjusted at each year end.

To use a mark-to-market basis leads to companies recognising unrealised gains and losses, which are taxable as they arise. Some insurance companies have continued to use the realisation method for tax purposes—that is, they have taxed gains and losses only when they are realised. For companies that organise their accounts based on the calendar year, the first point at which they are required to pay tax on a mark-to-market basis is 1 January 2002.

The industry feels that the arrangements are broadly satisfactory, and does not criticise or challenge them. However, there are outstanding discussions with the Revenue, and some concerns exist that the interaction between clause 83, and schedules 22 and 30, and clause 64 might have a problematic impact on insurance companies in due course. We can pursue that issue further when we come to it. Are the Government happy that everyone is geared up to cope with a starting date at the beginning of this year?

Ruth Kelly: I am grateful to the hon. Gentleman for setting out the purpose of the clause. I shall not repeat it because I am sure that the Committee has heard enough. The hon. Gentleman merely queries whether the industry is happy with the dates in the clause.

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The clause provides insurance companies with a special rule to allow them to postpone the move to a mark-to-market basis for tax purposes until 2002—a strict application law would make them go back to 1998. To be more precise, the previous basis of tax will still be available for periods of accounts that begin before 1 August 2001, which was the date of the announcement of the changes, and end before 31 July 2002.

The clause has been the subject of detailed consultation with the industry, the Association of British Insurers and others; they have expressed no desire to extend the transitional arrangements. The Bill reflects many of the points that they raised about the draft clauses published on 9 August. I hope that the assurances that I have given will persuade the hon. Gentleman to withdraw his amendment.

5.45 pm

Mr. Flight: This was a probing amendment. As I said, my understanding is that the industry is reasonably happy. I also wanted to ensure that the Government were happy, because if a new tax system is being introduced, taxpayers need to be able to deliver. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 64 ordered to stand part of the Bill.

Clauses 65 and 66 ordered to stand part of the Bill.

Clause 101

References to accounting practice and periods of account

Mr. Flight: I beg to move amendment No. 179, in page 78, line 45, at end insert 'and'.

The Chairman: With this it will be convenient to consider the following amendments: No. 180, in page 79, line 1, leave out from 'companies' to end of line 2.

No. 181, in page 79, line 3, at end insert—

    '(c) means generally accepted accounting practice with respect to accounts of non-UK companies that are intended to give a true and fair view, or equivalent, as applied in their country of incorporation.'.

Mr. Flight: The amendments have been tabled because the point has been raised that it does not make much sense to require all companies operating in the UK to use UK generally accepted accounting practice for their accounting. Many branches of such companies will not be UK-incorporated registered businesses and it would make more sense to allow those branches to use the GAAP of their own country rather than forcing them to use the UK GAAP in respect of their branch activities. To do that would create unnecessary administrative burdens for such branches and for companies which are incorporated outside the UK and thus not subject to UK company law but which, for whatever reasons, may be UK tax resident.

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It is possible that the profession has misunderstood the requirement in the clause, but I raise the matter to give the Government the opportunity to clarify their intention.

Ruth Kelly: There has probably been some misunderstanding. Clause 101 standardises definitions of accounting practice used in existing tax legislation. All accounting references are now to ''generally accepted accounting practice'', and one thing the clause does is to move into a general interpretation section a standard definition of GAAP that already appears in a number of places in tax law.

The part of the definition of GAAP that the Opposition seek to amend says that GAAP means GAAP as it applies to UK companies. However, that is not a new idea—at least 10 different parts of the tax code specify that it is accounting practice as it applies to UK companies that must be followed. The clause brings all those different definitions into one place with one wording.

There is one important place where the fact that it is UK GAAP that must be followed has been made explicit. This is in the general rule governing the computation of profits of a trade in section 42 of the Finance Act 1998, which required taxable profits to be computed using an accounting basis which gave a ''true and fair view''. That wording in section 42 is being replaced with the new definition of GAAP, but the requirement to provide a ''true and fair view'' is maintained because that is required by the definition of GAAP.

The opposition amendments should therefore be resisted on two grounds. First, references in the tax code to accounting practice have made it clear that it is UK accounting practice that is meant. Secondly, in applying the UK tax system, and to be fair to all businesses operating in the UK, there must be consistency. Why should there be a tax advantage or a disadvantage for a company because it follows whatever is a true and fair view in some other state or country? The amendments assume that there will always be a ''true and fair view'' or an equivalent concept in every other country. Of course, we do not insist that overseas companies draw up their accounts using UK GAAP. We require it to be followed only for the purposes of computing tax. It is likely that company law and accounting rules in other territories would show much the same result as if the UK GAAP had been used. On the two grounds that I have set out, I hope that the hon. Gentleman will withdraw the amendment.

Mr. Flight: I am glad that the Financial Secretary made it clear that there was no intent to require such non-UK-incorporated companies to use UK GAAP for their accounts. There is clearly an argument about tax fairness in terms of use of UK GAAP for UK tax calculation purposes, but the provision obviously adds to the burdens on businesses that have branches here, because their calculations for UK profits will be different from those for their overall accounts. Therefore, there will be yet more notes in the accounts explaining the differences.

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Clearly, in an ideal world, GAAP would be fairly common among at least the developed economies. I wonder whether the Government have considered how much tax materiality there is on the subject. The branch companies are mostly either north American or continental European. If the differences are not that major, is the exactness of the requirement to use UK GAAP for tax purposes worth the bureaucratic hassle?

What discussions have the Government had with the profession? Its representatives have raised the issue broadly with me. The issue is technical, not political, so we would not want to put the amendment to a vote, but I would like a further response from the Financial Secretary on those points.

Ruth Kelly: I have two points in response. First, there is nothing new in the provision. It makes a reference that was already in the tax system explicit by putting a definition in one place for ease of reference. Secondly, consistency of tax treatment in the UK is important. Although there may not be great differences between member states in the European Union, such uniformity is important. The last thing that we want to do is to introduce arbitrage when a company decides that it is advantageous for it to use one treatment rather than another. I urge the hon. Gentleman to withdraw the amendment.

Mr. Flight: It is interesting that the Financial Secretary should say that the Government would not want to encourage arbitrage, as there is a massive and dangerous encouragement of arbitrage for self-employed small traders in the Bill, which will cost the Revenue a fortune.

However, I have said that the issue is not major. I hope that the Government will keep it under review, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 101 ordered to stand part of the Bill.

Clause 67

Expenditure involving crime

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

Mr. Flight: We have not tabled amendments to the clause, although we have tabled a new clause that has not been selected but to which I shall refer briefly. There are some measures in the clause that it is important at least to mention, so that we hear whether the Government are satisfied that the problems that might be raised would be manageable.

Clause 67 stops UK companies receiving tax relief for payments made overseas that would have constituted a criminal offence if they had been made in the United Kingdom. It will largely affect UK companies operating in overseas territories through branch operations rather than through limited companies, mostly in developing parts of the world. However, it may make it prohibitively expensive for UK companies to operate through branches in areas where bribery is standard practice. That is unlikely to

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lead to a significant loss of tax revenue in the UK, because most companies whose overseas operations are profitable will operate in such territories through limited companies in order to protect their overseas revenue from being taxed directly in the UK. In addition, it may affect the UK banking and financial services industry, which tend to use branch operations.

We would be interested to know why UK law only is considered to be the appropriate test, and why not criminal activities under local law. Is there an EU angle, in that UK companies operating through branches will be directly affected but those operating through subsidiaries will not? Is a sort of EU freedom-of-establishment principle involved?

Another and not immediately obvious consequence is that UK companies with controlled foreign companies will have to compute UK-equivalent profits after making an adjustment, which could lead to some overseas companies that were not CFCs becoming CFCs. That would obviously increase the administrative burden. It is probably not a major problem, but have the Government thought about it?

The Chartered Institute of Taxation has expressed support for the fight against criminal bribery, but it raises two particular concerns. It points out that uncertainty could arise if a foreign company had a UK branch that came within the scope of UK corporation tax, but a part of the foreign company unconnected to the UK branch paid a bribe that would be criminal under UK law. If, separately, the UK branch made a payment to the head office of the foreign company to cover central costs incurred by the company that benefited from trade with the UK branch, and as the bribe benefited the whole company's business, it could be shown that the management fee paid by the UK branch included a payment towards the bribe made by the foreign parent. Would the UK branch have to disallow part of that payment towards the central overheads? That would lead to an additional compliance burden, but it also raises questions about the UK's claiming extraterritorial and extranational jurisdiction.

The second and more general point is that there is a risk that the payment would be disallowed in several countries, which could result in the possibility of multiple taxation. That is probably a fairly weak point, but similar points could arise with other costs such as business entertainment. I wonder whether the Government have focused on such issues.

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