Finance Bill

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Mr. O'Brien: The statement that the Paymaster General has made and the concluding part of her remarks are satisfactory. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Twenty-third schedule to the Bill.

Mr. O'Brien: As indicated earlier by the previous Chairman—I know that he was going to have a word with you, Mr. McWilliam—we intend to have just a brief stand part discussion. That is because there are no amendments that deal with one particular aspect of the schedule. We have received several representations from people who will have to deal in practice with paragraph 33, particularly the question of the transitional provisions. Although we have had some discussion on those, one of the most important things to keep in mind—this goes to the points raised by my hon. Friend the Member for Billericay—is that under schedule 23(33) relief is not available in respect of shares to the extent that a deduction has already been claimed under the old rules.

KPMG, backed up, so far as I have seen, by the Institute of Chartered Accountants in England and Wales, Grant Thornton and Ernst and Young, has said that there is a lack of clarity over how the rule will apply and how the relief already claimed will be calculated, particularly if a QUEST—qualifying employee share ownership trust—has been used and if shares have been acquired at various times and at various prices using tax relief from the company. I can go into greater detail if that is of any assistance, but I think that the Paymaster General will be aware of the point that I am making, because representations have already been made directly to the Treasury. What is sought, at the very least, is a commitment that the Revenue will clarify how paragraph 33 will be applied as part of the overall schedule. If that commitment is given, I dare say that there will be satisfaction all round.

Mr. Baron: I rise to support my hon. Friend's remarks and to seek clarification on two matters. One I have already raised, and I know that the Paymaster General, very generously, is going to respond to it in writing using the examples that I have given. It is on the clarification required over paragraph 8, which my hon. Friend has alluded to.

My second point relates to those paragraphs in which schedule 23 appears to allow companies to claim a corporation tax deduction if the acquisition of shares by, for example, an employee benefit trust, has been funded by a loan from the company. That is when a company has lent money to an EBT for it to purchase

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shares. I will take the Paymaster General's guidance on this, but I would suggest that if a loan is secured, it is unclear whether schedule 23 allows it to be set off by way of relief against corporation tax. Can she clarify that? It is an interesting point that does not seem to be covered by the schedule, unless I have missed it.

4.15 pm

Mr. Howard Flight (Arundel and South Downs): May I add my welcome to you as you chair our endeavours this afternoon, Mr. McWilliam?

I have a brief question for the Paymaster General. To what extent have the provisions of the schedule been crafted to interact with the expected results of the Accounting Standards Board guidelines on accounting for share schemes as charged for profit and loss? Has any of that led to the particular nature of these arrangements, or will there be the potential for considerable differences between the expected accounting treatment and tax treatment?

Dawn Primarolo: Three sets of questions have been asked: the first about loans offset, the second about the new accounting standards and the third on the transitional rules. To start with the latter, the hon. Member for Eddisbury wants to have confirmed on the record the discussions that have already taken place between the Revenue and companies. I am happy to do that for the record. The transitional rules, as we have explained, have been kept as simple as possible. They are intended to ensure that companies do not achieve a deduction twice for the same amount, but they do not create a tax charge if the amount already obtained for a share is greater than the relief due under the new rules, because that could be argued to be retrospective.

There were many ways in which companies achieved deduction before the new rules came into force, and it will be difficult to write detailed rules to cover every circumstance while ensuring that the right amount of deduction already claimed is justified under those rules. Several companies and tax practitioners have asked the Inland Revenue for guidance on how the transitional rule will operate in practice. It would be unusual if a company were to apply that rule before completing its next tax return in 2004. The Inland Revenue will, therefore, work with the interested parties who have expressed views on the issue, to develop the guidance on it. The main thrust will be to achieve a reasonable result based on the circumstances of each case. That has been the discussion to date.

The hon. Member for Billericay asked whether the loan for purchasing the shares will be offset against corporation tax. There is no relief for the principal loan, but the ancillary finance costs of obtaining the loan will qualify, together with any interest on it. I have been advised that that is the position.

Mr. Baron: May I be absolutely clear? For a loan, the simple answer is no. Will the Paymaster General confirm that schedule 23 does not actually restrict deductions to outright payments? For example, it does not appear to exclude loans. Does she agree that that should be clarified? Otherwise, it is ambiguous.

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Dawn Primarolo: I do not think that schedule 23 is ambiguous or needs clarification. However, as the hon. Gentleman has already asked that that should be part of my written response—as well as the earlier point that I said I would write to him about, notwithstanding my comments on it in Committee—I shall certainly revisit the matter and ensure that he gets an appropriate answer.

The final question was from the hon. Member for Arundel and South Downs on the alignment with accountancy treatment. The timing and amount of the corporation tax deduction is matched as far as possible with the tax charge on the employee. Although the rules depart from the proposed new accountancy treatment, they should not give rise to significant extra work for companies. The hon. Gentleman may know that the accounting treatment of share-based payments is undecided.

The timing and amount of the statutory tax deduction will be clear and accurate, and the new provisions will make no distinction between listed and unlisted or large and small companies. The companies that were consulted were not unduly concerned about timing issues or the fact that the relief does not follow the accounts treatment, favouring certainty above all else. The issue was touched on, but it also impinges on other areas of tax legislation as well as accountancy treatments and standards.

I hope that those remarks have dealt with the three outstanding queries on the schedule. There are no further remarks that I can make, as I have covered through the amendments the pertinent points that are contained in the schedule.

Question put and agreed to.

Schedule 23 agreed to.

Clause 141

Ending of relief for contributions to QUESTS

Mr. O'Brien: I beg to move amendment No. 242, in

    clause 141, page 82, line 8, at end insert—

    '(1A) Section 68 of that Act (principal charges to tax) shall be amended as follows:

    (a) in subsection (2)(c) for ''the rate applicable to trusts'' substitute ''the chargeable rate'';

    (b) insert a new subsection (8)—

    ''(8) For the purposes of this section the 'chargeable rate' is—

    (a) in respect of a chargeable event occurring before 1st January 2003, the rate applicable to trusts, and

    (b) in respect of any other chargeable event, the average marginal rate of corporation tax of all qualifying companies''.'.

The Chairman: With this it will be convenient to discuss amendment No. 243, in

    clause 141, page 82, line 17, at end insert—

    '(ba) in subsection (5) insert—

    ''(dd) the payment of any sum or transfer of any asset, after 31 December 2002, to the trustees of another trust for the benefit of the same or substantially the same beneficiaries as the trust'';'.

Mr. O'Brien: I should like to record my appreciation of all members of the Committee for having had the patience to wade through the most difficult area of schedule 23. I was glad to have the

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opportunity to place the arguments on the record and to gain such clarifications as were possible. That has been a major part of our proceedings this afternoon, and I hope that we will now be able to make more rapid progress.

Clause 141 ends relief for contributions to QUESTs—qualifying employee share ownership trusts—which are a special type of employee trust introduced in 1989 with specific statutory corporation tax deductions for contributions. Because of the restrictive statutory rules on how they could operate, they were mainly used as part of a tax planning scheme and not necessarily for their intrinsic merit. The statutory deduction has been replaced by the rules in schedule 24.

One draconian aspect of QUESTs is the clawback, whereby money going in attracts a deduction of 30 per cent. but is re-taxed at the trust rate of 34 per cent. if it is applied for a non-qualifying purpose, thus creating a net loss to employers. That is particularly harsh when, for example, a takeover of the group could leave cash stranded in a QUEST with no possibility of using it for a qualifying purpose, because QUESTs cannot buy shares in a company that is controlled by another company. Unquestionably, that will be common ground.

Given that relief for QUESTs has now gone, amendment No. 242 would remove the draconian aspect by reducing the clawback rate from 34 per cent. to the group's average corporation tax rate.

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