Finance Bill

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Mr. Jack: The Minister mentioned accounting practices. I wonder whether he will say a few words about the international dimension. It is clear, post-Enron, that there are significant differences in accounting standards and accounting definitions between, for instance, the United Kingdom and the United States, which may cause problems for multinational and international companies. I wonder whether such conflicts will be resolvable under the proposals.

John Healey: I do not see that such conflicts are likely. We will be dealing in later amendments with a divergence in practice between the USA and the UK. However, the measures draw directly on established accounting rules and practices, so they give us a consistent code under which to operate the tax relief system. We therefore have some certainty that they will operate securely and give us the assurance that we need as we move away from the previous approach, under which tax rules were specified in legislation.

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Under the new regime, disposals of intangible assets will be taxed on an income basis. To ensure that companies have an incentive to reinvest, however, a roll-over relief will apply where disposal proceeds are reinvested in new intangible assets. As I explained, that feature is a direct result of consultations during our preparation of the provision.

Intangible assets that companies held on 1 April this year—the date on which the new provisions came into effect—will generally be taxed under current law. That treatment responds to concerns expressed during the consultation by business and experts, who felt that existing capital gains assets should remain subject to the capital gains rules and should be grandfathered on any future sale. Disposals of such assets will, however, qualify for roll-over relief under the new rules for intangibles, rather than under the capital gains roll-over relief.

Mr. Burnett: One point that the Law Society made was that non-trading losses on intangible fixed assets to be carried forward to the next accounting period should be added to the list of carry-forward provisions. Is the Minister saying that the tax treatment of such assets should fall under the capital gains tax regime, not the proposed regime?

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John Healey: If I may, I shall return to that at the appropriate point in my remarks.

Schedule 29 sets out the detail of the provisions, and schedule 30 sets out the consequential amendments that are needed to other taxation legislation. Government amendments Nos. 212 to 214 are not substantive; they simply correct minor drafting errors that we have picked up over the past few days. They therefore form a proper part of schedule 30.

The legislation has been drafted in the new style that we adopted for the tax law rewrite project. The consultation draft that the Inland Revenue published at the time of the 2001 pre-Budget report was widely welcomed for its clarity and, by tax legislation standards, for its relatively plain English. That certainly helped the recent consultation process.

The reform in clause 83 and the accompanying schedules marks an important step on the road to a modern and competitive UK corporate tax system. As the hon. Member for Arundel and South Downs explained, the amendments would make capital gains roll-over relief available to companies that dispose of their pre-commencement intangible assets—those that pre-date 1 April—as an alternative to the roll-over relief provided by the new intangibles regime. That gives companies the scope to reinvest gains in a wider range of assets—tangibles and intangibles—and, in some cases, to defer tax on such gains for longer.

By way of background, I should explain that the roll-over relief provisions and the rules for dealing with companies' existing assets were the product of the extensive consultation process. The rules were designed to respond to the issues that business raised with us. They have, therefore, been widely welcomed. In particular, the facility to roll-over gains that are taxed as income under the new rules against the acquisition of further intangibles is unprecedented and generous.

The transitional arrangements, too, are already generous to companies. Companies are able to benefit from capital gains loss relief, indexation and 1982 values on the disposal of their existing assets at the same time as enjoying the new relief against current income on the assets that they buy.

Mr. Burnett: To put it simply, the regime is predicating a system whereby the gain is brought in to tax but is also shielded and can be used for roll-over within the capital gains tax regime.

Mr. Mark Field (Cities of London and Westminster): On intangibles?

Mr. Burnett: Yes, on intangibles.

John Healey: I shall come to that point. I shall pull together my responses to the remarks that have been made at the end of my comments.

The transitional arrangements are generous. A range of benefits is available to companies that, at the same time, enjoy the new relief against the current income of the assets that they buy. Roll-over relief has been expanded as a result of the consultation within the new framework, to cover capital gains on all pre-commencement intangibles, not just the limited

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categories that currently qualify for capital gains roll-over relief. While companies can no longer defer the gains on those disposals when they buy assets within the capital gains rules, they can now do so by reinvesting in not only the limited categories of intangible assets that currently qualify for capital gains roll-over relief but all intangibles within schedule 29.

Mr. Burnett: Are the Government considering enlarging the scope of roll-over relief so that all assets normally available for reinvestment will be considered?

John Healey: The simple answer is that we shall keep the matter, as we generally do, under careful and constant review.

It is not correct to say that we are limiting the range of reliefs available when pre-commencement assets are sold, nor that the proposals are in this respect unfair to companies, nor that they do not adequately take into account their expectations with regard to existing assets. The hon. Member for Arundel and South Downs suggested that there was an element of retrospection in the provision. I do not accept that argument, and would point out that the consultation on the changes began in March 1998, so the proposals have been in the pipeline and in the public domain, and have been the subject of detailed discussion with many of the representative bodies and interests in the field, for a considerable time.

As stated in the background information, the estimated cost of the provisions to the Exchequer is some £200 million, rising in due course to £350 million. I submit that schedule 29 and the clause that it supports represent—by anyone's standards—a generous set of proposals that has been developed in the light of extensive consultation. Finding the right balance between the benefits to be enjoyed by companies from the new relief and their expectations with regard to future disposals of their existing assets has been an important element in the consultation.

The proposals represent a balanced package at an affordable, but not insignificant, cost to the Exchequer. The package is both competitive and fair, because it provides relief for all expenditure on intangibles; fair taxation of sale profits; and roll-over relief to ensure that companies have an incentive to reinvest in further intangible assets.

The amendment proposed by the hon. Member for Arundel and South Downs would make the package even more generous. It would allow a choice of capital gains or intangibles roll-over relief, and would add to the Exchequer cost and alter the balance of the package. To that extent, the amendment goes too far and cannot be right at the moment.

Mr. Burnett: I am grateful to the Economic Secretary, whom I must congratulate on his appointment. Has the Treasury done an exercise as to the cost if the amendment were made?

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John Healey: I am grateful for the hon. Gentleman's congratulations. The direct answer is yes, and the cost would be about £50 million. The provisions, which are already generous, cost the Exchequer about £200 million a year, and the amendment would add significantly to that. For the other reasons that I have explained, we cannot support the amendment.

I shall pick up on several of the points put to me by hon. Members during this short debate. The hon. Member for Torridge and West Devon raised a question from the Law Society on what is essentially a minor drafting point. We do not think that it is material. It cropped up in our consideration when preparing the Bill, and the Inland Revenue will monitor matters in case our judgment proves incorrect.

The right hon. Member for Fylde (Mr. Jack) picked me up on my reference to ''very few exceptions'', a phrase that I included because there are indeed very few. He asked for examples. One may be life assurance assets, which are subject to the special insurance tax regime. Research development gives rise to special reliefs, and so falls into a different part of the regime.

I was asked how many businesses might benefit, given the nature and scope of the new regime. The number will build in time under the new rules, but our best estimate is that about 30,000 companies will benefit that would not have done under the previous regime.

On the basis of my remarks, I encourage the hon. Member for Arundel and South Downs to withdraw the amendment. If he is not prepared to do so, I must ask my hon. Friends to reject it.

Mr. Flight: If I did not make it clear up front, I should say that the reforms in the clause are welcome. A lot of work has gone into them. My understanding of the net cost of honouring the existing position is that it is not as great as £50 million. I have been advised that it is more like £20 million.

Is there any prospect of the deal and approach that the Government have taken being unfairly skewed? Without the amendment, a measure that cost £200 million is a big plus to businesses, but some people will obviously have intangibles from before 1 April 2002 and, in running their businesses, will expect the tax rules to be as they were. It is conceivable that sheltering them on disposal by other intangibles, for whatever reason, may not fit their businesses especially well.

Given the extensive consultation, what response to the issue have the Government encountered? Is the general view that there has not been much skewing and that the deal is acceptable, or have some argued that it is unfair to certain types of business to change the regime in midstream? It is important to know that because rough justice is not necessarily the answer to this sort of problem.

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