Finance Bill

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John Healey: Terms such as ''changing the regime midstream'' and ''rough justice'' are inappropriate, given that we have issued six consultation documents on the matter since 1998. As with other detailed points

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of the proposals, individuals and representative organisations have raised questions and made criticisms, but the total package has been widely welcomed as a reform that goes in the right direction and breaks precedent in a way that is modern and helpful to businesses and their professional advisers. The hon. Gentleman would be hard-pushed to find a representative body or individual that would not want that package to be introduced.

Mr. Field: I accept that the Institute of Directors and others have welcomed the proposals, that the measure is not new—it has been around for the past four years—and that there was substantial consultation on it. However, I have a philosophical concern that may not affect the schedule or the amendments but may have a longer-term effect.

Until 1997, the income and capital taxes regimes were on one stream, but the new Treasury team introduced a change in philosophy. Capital gains tax, especially for small entrepreneurs, is now at a far lower level. I wonder whether provisions that ensure that intangible fixed assets are put on an income rather than capital basis may mean higher rates of taxation for companies on those assets. I suspect that that is not the Government's intention at this juncture, and we have not received representations on it. However, on the basis that rates of income and capital gains taxes have diverged and that there has been an increase in Treasury meddling, which we may see more of in the future, Opposition Front-Benchers may return to the area of intangible fixed assets when we debate future finance Bills. As the Minister said, it is an important area, and goodwill on this matter is important to large and small companies in a globalised and high-information world.

Mr. Mark Hoban (Fareham): I want to raise a couple of points about the impact of changes in markets on the tax cost of the measures. Over recent years, telecom and information technology companies have incurred huge losses as a consequence of the write-down in value of assets because the consideration that businesses paid for those companies some years ago is no longer held to be a fair reflection of their market value. What is the implication of future write-downs on the tax cost set out in the Red Book? If a company such as Vodafone wrote off £0.8 billion of the value of assets acquired from Mannesmann, the transaction would not be covered by the schedule, but if future transactions of a similar magnitude incurred a similar write-down, that might give rise to some variations in the revenue.

In its representation, the Institute of Directors welcomed the new regime in general but went on to say:

''the great extent of legislation suggests that the plot, of simply following the accounts, has been somewhat lost.''

The Bill and the explanatory notes are somewhat longer than FRS 10, on which the measure is meant to be based.

John Healey: The hon. Member for Fareham (Mr. Hoban) raises an important point, of which we are all conscious in the light of our experiences of such large

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corporate problems. The massive goodwill write-offs that have followed some major takeovers have generally involved the acquisition of shares in the target company, rather than direct purchase of the assets. For clarification, the new relief would not apply in such cases. We are keen to encourage reinvestment in assets and the relief will be available only for new acquisitions, not for write-downs of assets that companies have previously acquired.

Mr. Hoban: I am grateful for the Minister's important clarification of the matter. I suspect that in transactions there will be some tension between vendors and purchasers: vendors will be interested in the substantial shareholdings rules and the benefits that they bring; and purchasers will increasingly want to use asset-based transactions to crystallise the goodwill in the transaction and benefit from the tax relief that that brings when the goodwill asset is amortised over however many years. They will also want to catch any major write-downs that may occur in the future if they believe that the value of the business that they have acquired has diminished.

John Healey: I suspect that we shall return in fuller detail to that issue when we discuss a later amendment.

I welcome and accept the general support offered by the hon. Member for Cities of London and Westminster (Mr. Field) for the reform proposals in the Bill. Perhaps he will allow me to take his specific points as fair warning—if we are fortunate enough to serve on a future Finance Bill together.

Mr. Flight: Although the area is very technical, the debate has usefully aired it. I repeat that, overall, the measures are welcome. I remain uncomfortable that some businesses may suffer as a result of what is intended to be, and is accepted as, a positive measure. Our amendment will not be accepted and is not sufficiently material to put to a vote, but I hope that the Government will examine the matter further to find out whether there might be any significant wobbly areas. Nobody would want changes to our tax system to have a material and effectively retrospective impact on previous decisions. That point is different from the one that I made yesterday about retrospective measures. If a business has done a major deal based on current tax rules, there is an expectation in our traditions that it will get grandfathered. That principle should therefore be followed as far as possible. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Chairman: I have deliberately permitted a fairly wide-ranging debate on the amendments because the issues are complex and interrelated. Also, the Committee did not have a clause stand part debate on clause 83, so it seemed right for the Minister to have the opportunity to range slightly wider in putting his case than the amendments would otherwise have allowed. That being so, I shall tell the Committee now that, although I am prepared to allow a more wide-ranging debate where matters are interrelated, I shall take that into account when considering whether to allow a stand part debate.

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Mr. Flight: I beg to move amendment No. 184, in page 405, line 44, at end insert—

'71A (1) This paragraph makes provision for the application of this Schedule where a controlling interest is acquired in a company (the first company) by another company (the second company), such that the first company becomes a member of a group of companies of which the second company—

(a) was already a member; or

(b) is or becomes the principal company.

(2) Immediately before the time when the second company acquires a controlling interest in the first company, where the first company owns intangible fixed assets, the first company shall immediately before that time be deemed to have disposed of those intangible fixed assets for a sum equal to such amount as shall result in neither a gain nor loss for capital gains tax purposes nor a credit or debit for the purposes of this Schedule as the case may be.

(3) Immediately after the time when the second company acquires a controlling interest in the first company, such part of the expenditure (the apportioned expenditure) by the second company on the acquisition of a controlling interest in the first company shall be treated as expenditure on acquiring the intangible fixed assets of the first company, as shall be just and reasonable. The tax written down value of the intangible fixed assets of the first company shall be deemed to be equal to the expenditure so apportioned.

(4) The third person is a company or other person from whom the second company acquired the controlling interest in the first company. Where this paragraph applies—

(a) the third person shall be deemed to have disposed of an intangible fixed asset for a sum equal to the expenditure deemed to have been incurred by the second company pursuant to sub-paragraph (3) above;

(b) the disposal by the third person of the intangible fixed asset pursuant to this sub-paragraph shall be deemed to be a separate asset from the shares in the first company; and

(c) any chargeable gain that accrues to the third person as a result of the disposal of the shares in the first company shall be treated for all the purposes of the Tax Acts as reduced by an amount equal to the expenditure deemed to have been incurred by the second company pursuant to sub-paragraph (3) above (and an allowable loss will be deemed to be increased by a like amount, as the case may be).

(5) The intangible fixed asset deemed to have been disposed of by the third person for the purposes of sub-paragraph (4) above shall be treated as having been created or acquired (as the case may be) at the time that the intangible fixed asset owned by the first company was acquired or created by the first company.

(6) In sub-paragraph (2), (3) and (5) above, references to the first company shall include references to one or more companies that were not in the same group as the second company before its acquisition of a controlling interest in the first company but as a result of that acquisition are in the same group as the second company after the acquisition.

(7) For the purposes of this paragraph, the second company acquires a controlling interest in the first company if the two companies are not in the same group and there is an acquisition by the second company of shares in the first company such that those two companies are in the same group immediately after the acquisition.

(8) This paragraph shall apply only if an election in writing is made jointly by the second company and the third person, such election to be made within the period commencing with the acquisition of the controlling interest in the first company and ending two years later.'.

The amendment picks up the issue that my hon. Friend the Member for Fareham has already raised. It is aimed at resolving the anomaly where the acquisition of assets results in a materially better tax result for the acquirer than if they had acquired the shares of the company carrying on the trade. Under the current provisions, where a company acquires a business from another person, the goodwill becomes

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purchased goodwill, as defined under generally accepted UK accounting practice, and hence may be tax depreciated, but if a company acquires the shares of a company carrying on a trade, as the Minister commented, the goodwill may not be amortised.

Clause 44 contains measures that operate in the entirely opposite direction, which make it much more attractive for vendors to dispose of shares than to dispose of assets. My hon. Friend the Member for Fareham referred to tension, but I see potentially more than that. The proposals may encourage complex schemes for deals that would put money into clever corporate financiers' pockets, and we do not want to create such complexity. I was unhappy to hear the Minister say earlier that the measure was intended to apply only to assets, not to shares. I take that to be the Government's position, and if their position is unchangeable, measures that are otherwise positive may bring with them many problems.

 

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Prepared 13 June 2002