Finance Bill

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John Healey: As the hon. Member for Fareham mentioned during our discussion on the previous set of amendments and as the hon. Member for Arundel and South Downs explained, there is a perceived tension in the Bill between the intangible assets reform and provisions in clause 43 on the exemption for substantial shareholdings. The amendment addresses that perceived tension with a provision that appears to be based on section 338 of the United States internal revenue code. This is not a new issue. We raised it during the consultation process, we considered it carefully when drafting the Bill and we shall keep the matter under review, as I explained to the right hon. Member for Fylde.

Both the intangibles and the substantial shareholdings reforms were developed following extensive consultation with business. In each case, the final outcome has been welcomed by business. Both reforms address what are, by anyone's standards, long-standing problems in the corporate tax system, which needed to be overhauled. At the asset tier, the new intangibles regime modernises the corporation tax base and removes the distortion against acquiring intangible assets. At the shareholder tier, the substantial shareholdings exemption removes a major obstacle to commercial restructuring.

We have included in schedule 29 a measure that will extend the intangibles roll-over relief to cases where a company reinvests by acquiring a controlling interest in another company and that newly acquired company has intangible assets within the regime. I hope that the Committee appreciates that this innovative rule will provide for a greater degree of neutrality between acquisitions in share and asset form, and that it will afford greater flexibility to companies as the number of assets within the new regime increases.

10.30 am

All in all, the reforms provide a sensible framework at shareholder and asset tiers that will enhance the competitiveness and flexibility of the UK corporate tax system. However, we understand the points that have been made about it. As I said earlier, we shall keep the matter under review. As we monitor the

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impact of the new regime in its first few years of operation, we shall consider the case for a further measure along the lines of the United States section 338 model should the evidence warrant it. However, I warn those hon. Members who may wish to press the point now or on Report that a range of factors will need to be taken into account.

The potential cost would need to be considered carefully. An elective provision of this sort, which would generally be used by companies only when there was an overall tax benefit to them, would be likely to carry a significant Exchequer cost. The amendment would increase that cost, as it appears to bring existing intangible assets within the new regime while they remain in the hands of the company that held them prior to commencement. Under the schedule, those assets are outside the regime until they actually change hands.

It is by no means clear that the proposed new paragraph would work satisfactorily in practice. I shall not go into the technical detail here; it will be more appropriate to do it in consultation with experts. However, it is a technically complex area and legislation along such lines would need to be developed in consultation with business to ensure that it achieved the objectives that we might wish for potential provisions of that nature. The amendment would also allow intangible assets to be treated as bought and sold under the election, but no other assets. It is hard to see why that should be so. The US equivalent rule applies to all assets, not only intangibles.

I assure Opposition Members that we will continue to keep the matter under review. We shall assess the impact of the reforms introduced in the Bill, and we shall consult business on future reforms to corporation tax. I would therefore encourage the hon. Member for Arundel and South Downs to withdraw the amendment.

Mr. Flight: I am glad to hear the Minister saying that the Government accept the tension, and that they are willing to keep the matter under review and consider following the US section 338 model. As the new economy sector recovers over the next few years, intangibles will be more important than ever. I am sure that the Revenue will keep a beady eye out for new schemes that try to marry the two conflicts—of buyers wanting to buy assets and sellers wanting to sell shares. The problem may be solved; otherwise, it may be an indication that it is time to make a change. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Flight: I beg to move amendment No. 197, in page 433, line 18, leave out from 'acquisition' to end of line 19.

The amendment is about the rules for bringing Lloyd's syndicate capacity within the new intangible property regime. Paragraph 128 of the schedule applies the new intangible property regime to existing syndicate capacity at Lloyd's—that is, the right that a corporate member of Lloyd's has to underwrite in syndicate. Syndicate capacity is already dealt with under an income regime for corporation tax purposes.

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It therefore makes sense immediately to bring existing capacity into the new rules. Lloyd's made representations to that effect during the consultation and is satisfied with what has been agreed.

The amendment concerns paragraph 128(4), on which the Treasury's explanatory note states:

    ''Paragraph 128(4) ensures that reinvestment relief under Part 7 is not prohibited on the realisation of existing capacity by virtue of the requirement in paragraph 38(1)(a) that the asset may have been a 'chargeable intangible asset' throughout the period it is held.''

That is covered by the decision, which is to be supported, to bring existing capacity within the new rules. A corporate member of Lloyd's who acquired a syndicate capacity in 1998 and realised in 2003 would be able to qualify for full reinvestment, provided they met the reinvestment requirements.

The wording of paragraph 128(4) seems not to achieve the result stated in the Treasury's note. It states:

    ''For the purposes of Part 7 (roll-over relief on realisation and reinvestment) the asset shall be treated as if it had been a chargeable asset from the time of its acquisition or, if later, the beginning of the first accounting period to which this Schedule applies in relation to it.''

That would surely mean that the capacity would be treated as having been acquired in 1998, when it was acquired, or if it were acquired later it would be considered to have been acquired on 1 January 2002. A significant period of ownership would therefore not qualify for reinvestment relief. That seems to be the opposite of the Government's intention, and if that is so it surely needs correcting, which is what the amendment is designed to do.

The wording of paragraph 128(4) continues to baffle the tax lawyers advising Lloyd's, who remain convinced that it states the opposite of what is both intended and in the Treasury notes. I hope that the Economic Secretary can place something on the record to make the wording mean what the Government intend it to mean.

John Healey: As the hon. Gentleman has explained, the amendment's purpose is to ensure that roll-over relief is not restricted in the case of an intangible asset that is a syndicate capacity at Lloyd's. He is right to say that the provision in question is intended to ensure that there is no such restriction. Even I can see that the wording of the paragraph may not be as clear as it ideally might be. Leaving aside interesting syntactical arguments over the precise meaning of the words in paragraph 128(4), although Lloyd's regards it as baffling there is only one way in which it could be interpreted. The provision will ensure that relief is not restricted, which is precisely the result that the hon. Gentleman is seeking.

On that basis, the amendment is not needed. The hon. Gentleman asked me to confirm that on the record, and I am happy to do so. I assure the Committee that the provision can, and will, be construed to ensure that there is no restriction on roll-over relief in those circumstances. I have listened carefully to what the hon. Gentleman has said and I have to concede that there is some merit in the amendment, which some would regard as belt and

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braces. Nevertheless, I should like to give the matter further thought, not least because a similar issue arises in relation to paragraph 127(3).

If necessary, the Government will table amendments to both provisions on Report. With that assurance and the confirmation that I placed on the record, I ask the hon. Gentleman to withdraw the amendment.

Mr. Flight: I thank the Economic Secretary for his helpful comments. I look forward to the matter being sorted out one way or t'other. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 212, in page 438, line 19, leave out 'group relief' and insert 'relief against total profits'.—[John Healey.]

The Chairman: With this it will be convenient to take Government amendments Nos. 213 and 214.

Mr. Flight: I am now in a state of disorganisation and not certain whether the amendment to which you have just referred, Mr. Gale, is that which I wish to talk about. I stood up originally to raise something under a stand part debate on schedule 29. Which amendment are we referring to?

The Chairman: We are discussing Government amendment No. 212, with which we are taking amendments Nos. 213 and 214.

Mr. Flight: I do not wish to oppose those amendments, but I should like the opportunity to raise another issue under schedule 29.

Amendment agreed to.

Amendment made: No. 213, in page 439, line 3, at end insert—

    'existing asset paragraph 118(3)'.—[John Healey.]

Question proposed, That this schedule, as amended, be the Twenty-ninth schedule to the Bill.

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