Mr. Hoban: May I just establish the issue of the valuation of stock? I have practised as a chartered accountant and worked on transactions in which the apportionment of considerations is important. Ordinarily, I would expect that stock to transfer at a value determined in line with United Kingdom GAAP. Is the expectation in the clause that the value under UK GAAP does not necessarily equal a just and reasonable apportionment of consideration?
If we are talking about a divergence in valuation, the amendment tabled by my hon. Friend the Member for Arundel and South Downs is important because it seems unnecessary to add an additional layer of complexity to a transaction over and above that which normally arises through the valuation of stock in determination of consideration, goodwill or other aspects of a transaction. There is a perfectly reasonable valuation technique available in UK GAAP and it would be odd to introduce another one when we are referring to the just and reasonable apportionment of consideration.
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John Healey: As I explained earlier, I do not accept that the provision introduces additional complexity. There is a much stronger argument that the better alignment and greater coherence in the proposal will make things easier for business, not more complicated.
The short answer to the hon. Gentleman's question about the valuation of stock being the same as under the GAAP provisions is that it nearly always is.
Mr. Flight: The Minister's latter comment is the crucial point. Perhaps I should have made it clear that this is a probing amendment. As it was suggested by the Institute of Chartered Accountants I thought that the Government would want to take it seriously. The chartered accountants' underlying point, on which my hon. Friend the Member for Fareham commented, is that ''just and reasonable'' needs to mean GAAP accounting treatment for arm's length parties; and if, while understanding the consistency arguments, the Government were thinking of some other accounting basis it would not be reasonable.
To judge by what the Minister said, the problem has probably been solved, but I trust that the Government will consult the Institute of Chartered Accountants to ensure that everyone is happy about it. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 104 ordered to stand part of the Bill.
Clause 84 ordered to stand part of the Bill.
Gains of insurance company from venture capital investment partnership
Amendments made: No. 215, in page 447, line 32, leave out to end of line 19 on page 448 and insert
'Meaning of ''venture capital investment partnership''
2 (1) A ''venture capital investment partnership'' means a partnership in relation to which the following conditions are met.
(2) The first condition is that the sole or main purpose of the partnership is to invest in unquoted shares or securities.
This condition shall not be regarded as met unless it appears from
(a) the agreement constituting the partnership, or
(b) any prospectus issued to prospective partners,
that that is the sole or main purpose of the partnership.
(3) The second condition is that the partnership does not carry on a trade.
(4) The third condition is that not less than 90% of the book value of the partnership's investments is attributable to investments that are either
(a) shares or securities that were unquoted at the time of their acquisition by the partnership, or
(b) shares that were quoted at the time of their acquisition by the partnership but which it was reasonable to believe would cease to be quoted within the next twelve months.
(5) For the purposes of the third condition
(a) the following shall be disregarded
(i) any holding of cash, including cash deposited in a bank account or similar account but not cash acquired wholly or partly for the purpose of realising a gain on its disposal;
(ii) any holding of quoted shares or securities acquired by the partnership in exchange for unquoted shares or securities;
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(b) whether the 90% test is met shall be determined by reference to the values shown in the partnership's accounts at the end of a period of account of the partnership.
(6) Where a partnership ceases to meet the above conditions, the company shall be treated as if the partnership had continued to be a venture capital investment partnership until the end of the period of account of the partnership during which it ceased to meet the conditions.
(7) A partnership that ceases to meet those conditions cannot qualify again as a venture capital investment partnership.
For this purpose a partnership is treated as the same partnership notwithstanding a change in membership if any person who was a member before the change remains a member.'.
No. 216, in page 449, line 3, leave out sub-paragraph (3).
No. 217, in page 449, line 44, at end insert
'(3A) The operation of sub-paragraph (3) is not affected by the partnership having ceased to be a venture capital investment partnership before the time at which the distribution is treated as received by the company.'.
No. 218, in page 450, line 37, at end insert
'Investment in other venture capital investment partnerships
8A (1) For the purposes of paragraph 2 (meaning of ''venture capital investment partnership'') an investment by way of capital contribution to another venture capital investment partnership shall be treated as an investment in unquoted shares or securities
(2) The Treasury may by regulations make provision, in place of but corresponding to that made by paragraphs 3 to 8, in relation to gains accruing on a disposal of relevant assets by such a partnership.
(3) The regulations may make provision for any period of account to which, in accordance with paragraphs 10 to 12, this Schedule applies.'.
No. 219, in page 451, line 11, at end insert
'and also includes any debentures'.
No. 220, in page 451, line 22, at end insert
'(3) References in this Schedule to capital contributed to a limited partnership include amounts purporting to be provided by way of loan if
(a) the loan carries no interest,
(b) all the limited partners are required to make such loans, and
(c) the loans are accounted for as partners' capital, or partners' equity, in the accounts of the partnership.'.
No. 221, in page 451, line 22, at end insert
(4) For the purposes of this Schedule the assets of
(a) a Scottish partnership, or
(b) a partnership under the law of any other country or territory under which assets of a partnership are regarded as held by or on behalf of the partnership as such,
shall be treated as held by the members of the partnership in the proportions in which they are entitled to share in the profits of the partnership.
References in this Schedule to the company's interest in, or share of, the partnership's assets shall be construed accordingly.'.[Ruth Kelly.]
Schedule 31, as amended, agreed to.
Clause 85 ordered to stand part of the Bill.
Mr. Flight: I beg to move amendment No. 105, in page 453, line 3, after 'effect', insert
'in the corresponding underwriting year'.
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The Chairman: With this we may discuss the following amendments: Government amendment No. 205.
No. 106, in page 453, line 16, at end insert
'and for the purposes of section 172 above shall be treated as a payment made at the time the contract takes effect.'.
No. 107, in page 454, line 5, after 'effect', insert 'in the accounting period'.
Government amendment No. 206.
No. 108, in page 454, line 22, after 'contract', insert
'at the time the contract takes effect'.
Mr. Flight: Schedule 32 deals with the tax treatment of what tax legislation terms ''quota share contracts'' at Lloyd's, a term that is already defined in the Finance Acts of 1993 and 1994. I understand that these provisions do not affect all the commercial quota share reinsurance contracts that Lloyd's members may enter into, but only specific forms of reinsurance contract under the rules and practices of Lloyd's, such as exeat policies and some estate protection plans.
The first part of the scheduleparagraphs 1 to 5amends the 1993 Act provisions for individual members of Lloyd's. The second part deals with corporate members as per the 1994 Act, but the two are broadly parallel. As I understand it, the purpose of the schedule in each case is to remedy deficiencies in the original legislation that could have led to Lloyd's members getting too little or too much tax relief when they took out such a policy.
For example, if a Lloyd's member pays a cash call into a syndicate to meet losses, that injection of funds can be expected to reduce the price that he would later have to pay to take out a personal reinsurance policy. However, the cash call is not itself a deductible expense, and if the syndicate's taxable result is not declared before the policy takes effect, the member will get no relief for the amount paid in by way of the cash call.
Conversely, existing legislation could in certain circumstances give too much relief. That could happen, for example, if the syndicate has already declared a loss for tax purposes before the quota share contract takes effect, but has not called the loss from its members. In that case, the Lloyd's member might effectively get relief twice for the same economic loss.
I shall first address amendments Nos. 105 and 107, which go together, and then amendments Nos. 106 and 108. The first two concern the proposed restriction of relief as it applies to contingent contracts. Amendment No. 105 deals with individuals, and amendment No. 107 with corporates.
I shall focus on amendment No. 105. There exist within Lloyd's a number of estate protection plans that are within the scope of clause 85 and schedule 32. These are personal reinsurance polices that are contingent on the death of the underwriting member. As a matter of legal construction, the same issue arises in the provisions dealing with corporate members of Lloyd's, although I am not aware that it is a practical concern, at least at present. The purpose of the amendment is to clarify the operation of the provisions.
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Let us take the case of individual members. Paragraph 2 of the schedule provides that the premium under such a policy is wholly tax-deductible if the contract does not come into effect. If the contract comes into effect the deductible amount is restricted by any transferred losses that are declared before that date. The practice at Lloyd's is that members who take out estate protection plans usually pay a premium in the December of one year to cover themselves for events in the following calendar year. For example, the premium paid in December 2002 will purchase cover for calendar year 2003. That gives rise to the practical issue that the premium is tax deductible as an expense in the income tax year 2002-03. Paragraph 2 of schedule 32 might be read as requiring members to wait until December 2003 before they can know by how much the premium is tax deductible for that year. Members cannot know before then whether they will die in circumstances such that the tax deduction will be restricted under the proposed new section.
I am sure that the Government do not intend that members of Lloyds should be unable to make their tax returns for an income tax year until after the following 31 December. The amendment deals with that uncertainty in a practical way by requiring the member to look only at events that occur up the end of the corresponding underwriting year. The parallel amendment for corporate members requires the corporate member similarly to look only at events that occur up to the end of the year. I hoped that the Minister would confirm that that was the intention, although it is not specifically stated. Alternatively, she may acknowledge the problem and say that the Revenue will accept provisional figures, which is not as good as tidying up the matter but would partly deal with it.