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Mr. Flight: I beg to move, That the clause be read a Second time.
This is a technical proposal to sort out a continuing anomaly from the Finance Act 1996, and is designed particularly to sort out some problems for PFI companies. PFI companies can account for the cost of construction assets for the public sector as either fixed assets or financial assets depending on the interpretation and application of financial reporting standard 5, application note F. The corporate tax treatment does not always follow the accounting treatment and, with either accounting treatment, the cost of construction can be taxed on a capital basis.
The current loan relationship legislation under the 1996 Act provides that where interest is capitalised into a fixed asset for accounting purposes, a corporate tax deduction can be taken in the accounting period in which the interest is incurred. Where interest is capitalised into a financial asset, the Revenue's view is that the corporate tax deduction should be spread over the life of the asset, with the profile of the deductions following the write-down of the asset in the balance sheet. The tax deduction will not be taken at a time when there is an equivalent debit to the profit and loss account and does not follow the accounting treatment.
The pricing of PFI contracts takes into account the time value of money. An interest deduction is worth more and will reduce the price to the public sector if it is available sooner rather than later. Many PFI companies
have priced on that basis. The current rules prejudice companies that account for the construction costs as a financial asset. New clause 2 is designed to correct this anomaly, providing that the timing of the deduction for capitalised interest is not dependent upon the interpretation of accounting guidelines. The new clause amends the loan relationship legislation as enacted by the Finance Act 1996.
Dawn Primarolo: I am a little surprised that the hon. Gentleman is still pushing this new clause, particularly as I understand that it was prompted by a practitioner group seeking clarification of the operation of the existing legislation. That clarification has been provided and accepted by that group. The new clause is unnecessary. I shall ask the House to reject it, but I should briefly explain the position regarding existing legislation. The practitioner groups to which the hon. Gentleman has referred have accepted the guidance from the Revenue.
The new clause provides for an interest deduction to be allowed to a company when that interest is accrued, even though the interest may not be debited to the company's profit and loss account. That can occur quite properly in accordance with the UK generally accepted accounting practice as part of the capitalisation of the construction costs of a major capital project.
The new clause is intended to ensure that where interest and associated construction costs are accounted for as financial assets, the interest costs can be deducted for tax purposes as they accrue. The new clause is unnecessary. The loan relationships legislation in the Finance Act 1996 already provides for capitalised interest to be deducted as it accrues despite not having been taken into the profit and loss account.
As I said, I understood that the new clause, tabled some weeks ago, was related to clarification for particular practitioner groups. Following the tabling of the new clause, constructive dialogue took place between the Revenue and the external representatives of the head office, PFI contracts group. I am sorry that the hon. Gentleman has not been informed that that reassured the group that existing legislation already provides the certainty that it requiresspecifically, that the Revenue accepts that, where a PFI property is a fixed asset for tax purposes, it will fall within the definition of a fixed capital project in paragraph 14 of schedule 9 of the Finance Act 1996. That ensures that relief for interest is properly given as it accrues. The Revenue has confirmed the provision and will confirm it again in new guidance in the very near future. I ask my hon. Friends to vote against the new clause, should it be put to the vote. It is unnecessary because the current legislation is quite clear.
Mr. Flight: I am grateful for the Paymaster General's comments, which had not been relayed to me. The briefing behind the new clause was not the group to which she referred. As it appears that the Government picked up the point from the new clause that we tabled, it would have been helpful if the Government could have advised us. However, on the basis that the problem has been dealt with, I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.
'(1) Where this section applies
(a) the repeal of section 257AA of, and Schedule 13B to, the Taxes Act 1988 (children's tax credit) by sections 1(3)(a) and 60 of, and Schedule 6 to, the Tax Credits Act 2002 (the 2002 Act); and
(b) the repeal of the references to "section 257AA" in section 257C of the Taxes Act 1988 by section 60 of, and Schedule 6 to, the 2002 Act
shall not apply.
(2) This section applies where the claimant is wholly or partly excluded from entitlement to child tax credit or working tax credit (or both) by reason of being a person subject to immigration control within the meaning of section 42 of the 2002 Act and regulations made thereunder.'.[Mr. Flight.]
Brought up, and read the First time.
Mr. Flight: I beg to move, That the clause be read a Second time.
This is a probing new clause, which provides for children's tax credit to continue under the new child tax credit arrangements for persons subject to immigration control. We are essentially seeking Government comment, and perhaps an undertaking to review the tax credits regime as it applies to immigrant workers and impacts on their children. Practical issues are lurking, and nothing in the new child tax credit guide says that migrant workers who were previously entitled to children's tax credit will not be entitled to the new child tax credit. That is likely to result in applications being made in ignorance of the changes to payments and then to potential problems in recouping the moneys paid from parents who may not be able to afford it. In those circumstances, do the Government intend to pursue reclaims? There is also an issue of whether it is right to prejudice the children of genuine migrants, especially when the Chancellor's Budget speech specifically mentioned improvements to skilled migrants' programmes and to the skills needed.
Mr. Laws: We support the new clause and commend the hon. Gentleman for bringing it forward. The low income tax reform group has also helped to highlight the issue. The most important aspect of the new clause is that it aims to restore the position of certain skilled migrants to what pertained before the abolition of the children's tax credit and the introduction of the child tax credit in April this year. It seems that there have inadvertently been some losers as a consequence of the changes introduced in the Budget. Among those losers are skilled migrants from non-EU countries who lose entitlement under the new regime to a tax credit that they previously enjoyed. In some cases, individuals could be as much as £10 or even £20 worse off per week, which is unfortunate given that we are talking about a group of people who may already be on low incomes.
The situation gives rise to three issues of fairness, the first of which is the fairness of where we are now under Government regulations by comparison with where we were before the changes were introduced. It appears that a particular group of workers has been put in a worse position with no apparent justification. The second potential unfairness is the comparative treatment of EU
and non-EU individuals working in this country, with only the EU individuals receiving child tax credit, even though they may be in exactly the same jobs as the non-EU individuals. The third issue is the need to flush out Government thinking about why particular individuals should be denied a tax credit when they are paying tax on the earnings from the employment that they are entering into in this country. That calls into question the thrust of the Government's approach on tax credits and whether they are supposed to represent the reimbursement of tax already paid or constitute some kind of benefit that the Government can withhold on the basis that tax credits are regarded under existing rules as being public funds to which individuals subject to immigration controls are not entitled to have recourse. That seems to be the basis on which the Government are withholding child tax credits from the individuals in question. This is an important matter, and we have too little time to explore it. I hope we have given the Paymaster General enough time to address some of the issues.
Dawn Primarolo: The issue is quite straightforward, and the new tax credits follow the practice adopted with the working families tax credit and the disabled person's tax credit. The child tax credit replaces elements of both those tax credits as well as children's tax credit relief. From 2004, the child elements of out-of-work benefits from income support and jobseeker's allowance will build on the benefits of child benefit itself.
It is a long-standing requirement of immigration rules that those who come to the United Kingdom should be able to support themselves without recourse to public funds. For that reason, persons subject to immigration controls are not able to claim the new child tax credit, as they were previously not able to claim the working families tax credit and the disabled person's tax credit. The new child tax credit incorporates elements from a range of systems of supporttax, tax credits and social security. It is inevitable, therefore, that there will be changes in comparison with the existing system.
The issues for income tax relief, such as the children's tax credit, are different in this area from those for the payable tax credits, because the value of the relief can never exceed the income liability. On that point, the working families tax creditthe main method of support in the last Parliament for working families on lower incomesprovides a precedent for how to proceed in these circumstances. The rules for the new tax credits need to fit within the same wider policy framework as those for working families tax credit.
The child tax credit is the means by which we now support children. In terms of immigration laws, we are simply following the long-established policy that some people are allowed to remain here subject to certain conditions, which means that they must be able to support themselves. Conditions attached to leave to remain are a matter for the Home Office, not for our regulations. Within the wider policy framework, we have worked to ensure that the rules are fair and work fairly between couples.
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