Finance Bill

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Dawn Primarolo: I hope that I shall be able to explain to the hon. Gentleman that his amendment is not necessary, as discussions with the industry have taken place. It is a complex matter, but I shall try to cover it. The hon. Gentleman explained in his introductory remarks the purpose of clause 100, and I am grateful for his comments.

The amendment would introduce a relaxation in the rules defining a distribution of profit. Where distribution treatment would otherwise apply to payments that to any extent depend on the results of the company's business, those payments would instead be deductible as interest in computing taxable profits if hedging arrangements exist. That is tantamount to providing interest relief for dividends. I am sure that that is not what the hon. Gentleman intends.

The Government believe that the clause provides carefully targeted changes that benefit the UK by making it more competitive while protecting the UK tax base. I assume that the hon. Gentleman is generally content with the clause, because the amendment does not change the way in which it operates. Instead, it uses the definition of hedging arrangements in the clause for a completely different purpose. The clause has been carefully drafted to include a specific type of security that is not motivated by UK tax considerations. It does little more than test the commerciality of the return on the investment by reference to the amount paid in, as the hon. Gentleman said. Any amount greater than a

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reasonable commercial return will rightly continue to be treated as a distribution.

If payments under a security at least partly depend on the results of the company's business, there is no obvious reason why the simple presence or absence of hedging arrangements should determine whether there is a distribution of profit. Sums arising under hedging arrangements in such circumstances are already dealt with under the established tax code and are independent of the distributions legislation.

Having had legal advice and discussions with industry representatives, we are confident that hedging arrangements will not cause the returns on securities intended to gain the benefit of the clause to be treated as distributions under other legislation. In cases that do not involve the specific asset-linked securities at which the clause is targeted, other distributions legislation may apply in the normal way.

In discussions with the industry, it has been agreed that the Inland Revenue will provide detailed guidance in manuals that will be publicly available on the application of the clause and other relevant legislation, including the legislation referred to in the amendment, and that it will discuss the draft with industry representatives to ensure that the point is covered.

It is illogical for the presence or absence of hedging arrangements to influence the application of the distribution treatment in the circumstances set out in the amendment. We are confident that guidance will reassure on that matter. For those reasons, I hope that the hon. Gentleman will be satisfied that the point is now covered. Should he want to be involved, and should he have further comments to make, we could ensure that he had a draft copy of the regulations at the same time that it was provided to the industry.

11.45 am

Mr. Flight: I am very pleased to hear that that point has been picked up and will be covered in the guidance notes. I should be very grateful for a copy and, on that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: No. 211, in page 77, leave out lines 13 and 14 and insert—

    ''(6) For the purposes of subsection (5) above, ''control'', in relation to a company, means the power of a person to secure—

    (a) by means of the holding of shares or the possession of voting power in or in relation to the company or any other company, or

    (b) by virtue of any powers conferred by the articles of association or other document regulating the company or any other company,

    that the affairs of the company are conducted in accordance with his wishes.

    (7) There shall be left out of account for the purposes of subsection (6) above—

    (a) any shares held by a company, and

    (b) any voting power or other powers arising from shares held by a company,

    if a profit on a sale of the shares would be treated as a trading receipt of a trade carried on by the company and the shares are not, within the meaning of Chapter 1 of Part 12, assets of an insurance company's long-term insurance fund (see section 431(2)).''.—[Dawn Primarolo.]

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Clause 100, as amended, ordered to stand part of the Bill.

Clauses 106 and 107 ordered to stand part of the Bill.

Schedule 33

Venture capital trusts

Mr. Flight: I beg to move amendment No. 233, in page 459, line 29, after ''company'', insert—

    ''(irrespective of whether some or all of those shares are retained or cancelled)''.

The Chairman: With this it will be convenient to take the following amendments: No. 234, in page 459, line 38, after ''company'', insert—

    ''(irrespective of whether some or all of those shares are retained or cancelled)''.

    No. 235, in page 459, line 40, at end insert—

    ''(2A) For the purposes of this Part of this Schedule there is also a merger of two companies (''the merging companies'') if—

    (a) each merging company issues shares to members of the other merging company, and

    (b) the shares issued to the members of each merging company are issued—

    (i) in exchange for their shares in that company (irrespective of whether some or all of those shares are retained or cancelled), or

    (ii) by way of consideration for a transfer to the company issuing the shares of the whole or part of the business of the other merging company.''.

Mr. Flight: I begin, with modesty, by saying that this measure is one thing in the Finance Bill that my representations over two or three years may have had some little hand in achieving.

Dawn Primarolo: Well done.

Mr. Flight: I thank the Paymaster General.

My point is a small but important one. Venture capital trusts have been quite a useful, well-ordered and well-structured vehicle for getting money for new enterprises. I forget how long they have been going, but I think that it is about five years. It is inevitable that some have done well and some less well, that some are very viable and others have become less viable. As time goes by, there is an issue of how the whole matter is to be sorted out and tidied up. Not, I think, by intent, but in the original drafting, VCTs could not invest in the securities of other VCTs. Such investments were non-qualifying investments, so the natural market processes of mergers and takeovers was prevented. The time is now due for that to be able to happen and I greatly welcome the fact that clause 107 and schedule 33 address that issue.

The three amendments are not hugely fundamental to the main point, but seek to draw the definition of merger slightly more widely, to allow as many commercial situations in that territory to be covered as is reasonably possible. They would extend the fairly limited definition of merger in schedule 33(10) to cover situations where shares in one VCT may be cancelled or retained and where a merger arrangement involves both VCTs issuing shares to shareholders in the other VCT.

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The Minister might say that the schedule as drafted intends to cover all forms of fair and reasonable restructuring, so I repeat that, while this is not a major point, it would be a pity, having got to this stage, not to cover all relevant reasonable situations for VCT restructuring.

Dawn Primarolo: I congratulate the hon. Member for Arundel and South Downs on his tenacity in pursuing that point through various Finance Bills. Those who can affectionately cast back their minds to the Finance Act 2000 will recall the hon. Gentleman raising that point and the then Economic Secretary to the Treasury giving an undertaking that we would consider it. A working group was formed to look at the issue and come forward with proposals. There has been extensive discussion with the venture capital trust industry on providing for the arrangements in the clause.

Two routes have been provided, and the third route offered by the amendment was never raised in discussion by the industry. Quite late on, the Law Society of England and Wales proposed a third route, which the amendment follows, to achieve the intentions of the clause. The third route is not necessary and, to be honest with the hon. Gentleman, we have simply not had time to look carefully at the possibilities that it might provide. At the present time, I am more than a little nervous that inadvertent avoidance that was not intended in other interactions with the tax system might be possible.

I assure the hon. Gentleman that what the amendment seeks to provide is already provided. None the less, we will continue to look at that area to give the proposals proper consideration, but at this stage I am not prepared to amend the Bill when the routes are already provided. Given that he has been successful in the past by our allowing the Inland Revenue to go away and look at an amendment, I hope that on this occasion he will accept that we have not had time closely to look at the amendment, which we do not think is necessary. If he withdraws it, however, I shall certainly make sure that it is covered properly and that a detailed response is sent to the Law Society.

Mr. Flight: I thank the Paymaster General for her comments and I agree with what is provided, which would allow most venture capital trust consolidations of which I can think to occur. However, I am glad to hear her commitment that she and the Revenue will consider whether the issue is sufficiently material to address. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 33 agreed to.

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