Finance Bill

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Mr. Mark Prisk (Hertford and Stortford) (Con): My concern is that there should be a strategic view underscoring the provisions. Without wishing to stretch your patience too far, Sir John, we were hoping for a glimpse of that strategy. We would be happy for the Government to adopt a broad view on where the lines can be drawn vis-à-vis the scope and remit of the ECJ. I understand that that would go too far beyond the scope of the debate, but it would be helpful if the Minister told us that such a strategy is being considered, and whether there will be an opportunity in the not-too-distant future for the House to consider that strategy.

Dawn Primarolo: With respect, the corporate tax review and the dialogue that has been going on for nearly two years address a more fundamental question: the appropriateness of, and the response to, a whole range of measures in the corporate tax system ranging from capital allowances to schedules. The review raises the question of how to assist investment, and the consultation on that was published at the time of the pre-Budget report on assisting companies with equity finance.

There is a much more fundamental debate concerning how we ensure that our corporate tax system is responsive and secures revenue, but is also broad-based, intervenes at the correct time where there is market failure and ensures that companies are able

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to develop and grow while meeting the challenges of the UK and global economy.

On the question of ECJ rulings, the hon. Gentleman will have to accept that it would be foolish of the Government to try to assume what the ECJ may say in future about cases which may or may not come before it. The Government's purpose is to develop a robust, active corporate tax system which is on all fours with the legal requirements, and that is precisely what we are doing. The hon. Gentleman's obsession with the ECJ blurs a more strategic focus on what the corporate tax system should look like.

The discussion with business has been very productive and is continuing, but it has far-reaching consequences for changes in the tax system. The hon. Gentleman should remember the changes to intellectual property rights, research and development tax credits, and capital gains tax or the improvements to the taper, where we moved away from indexation. There is a question of the speed at which agreement is achieved by business and Government as we take on these changes.

Mr. Prisk rose—

The Chairman: Order. With great respect to the hon. Gentleman and the right hon. Lady, I think that she has been tempted down this road quite far enough. It is well removed from the scope of the clause. It is perhaps an important matter for another debate at another time, perhaps in a different place, but not in this Committee.

Dawn Primarolo: Forgive me, Sir John. I was trying to assist the Committee, but I realise that I have gone way beyond my focus on clause 30, and I am grateful to you for drawing me back to the subject.

It is a requirement of any Government to ensure that uncertainties, real or otherwise, that business identifies as affecting its behaviour are dealt with. The clauses, of which clause 30 is the first, will remove all doubt identified by business, regardless of whether the Government believed that there should have been any uncertainty.

I hope that as the debate progresses the Committee will accept not only that the Government work closely with business in discussing the issues—and have responded to its requests in several places in the clauses—but that we made it very clear that there were no other suggestions or possibilities for dealing with the matter, and no other suggestions were advanced. I commend clause 30 to the Committee.

Question put and agreed to.

Clause 30 ordered to stand part of the Bill.

Schedule 5 agreed to.

Clause 31

Exemptions for dormant companies and

small and medium-sized enterprises

Mr. Prisk: I beg to move amendment No. 9, in

    clause 31, page 26, line 9, at end insert—

    '5AA(1) Paragraph 1(2) above does not apply in computing for any chargeable period the profits and losses of a potentially

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    advantaged person if that person is a company which is dormant but which does not satisfy the condition in paragraph 5A(2).

    (2) Sub-paragraph (1) above does not apply in respect of any accounting period of a company if the Board gives the company a notice under this sub-paragraph requiring the company to compute the profits and losses of that accounting period in accordance with paragraph 1(2) above.

    (3) A notice may be given in accordance with sub-paragraph (2) above only if the Board has reasonable grounds to believe that in that accounting period the company has been party to any transaction in respect of which provision has been made or imposed otherwise than for bona fide commercial reasons or as part of a scheme or arrangements for the avoidance of tax.

    (4) In this paragraph ''dormant'' has the same meaning as in section 249AA of the Companies Act 1985 (see subsections (4) to (7) of that section).'.

The Chairman: With this it will be convenient to discuss the following:

Amendment No. 10, in

    clause 31, page 26, line 9, at end insert—

    '5AB(1) Paragraph 1(2) above does not apply in computing for any chargeable period the profits and losses of a potentially advantaged person if that person is a company which satisfies the condition in sub-paragraph (2) below.

    (2) The condition is that either—

    (a) the company is in insolvent liquidation;

    (b) the company is in insolvent administration;

    (c) an appointment of a provisional liquidator is in force in relation to the company under section 135 of the Insolvency Act 1986 or Article 115 of the Insolvency (Northern Ireland) Order 1989;

    (d) the company is in insolvent administrative receivership; or

    (e) under the law of a country or territory outside the United Kingdom, circumstances exist corresponding to any of those described in paragraphs (a) to (d) above.

    (3) For the purposes of this paragraph, the company is in insolvent liquidation, in insolvent administration or in insolvent administrative receivership if it is in insolvent liquidation, insolvent administration or insolvent administrative receivership for the purposes of paragraph 6A of Schedule 9 to the Finance Act 1996.'.

Mr. Prisk: This is my first speech this afternoon and I am pleased to welcome you to the Chair, Sir John. I am sure that you will continue to guide us and keep us on the straight and narrow.

The clause seeks to provide a range of exemptions for dormant companies and small and medium-sized enterprises in the context of transfer pricing. The amendments are probing.

The purpose of amendment No. 9 is to extend the exemption for dormant companies to include those that become dormant after 1 April this year. A company is dormant and, therefore, exempt from the requirement to prepare a report and accounts during any period for which it has no significant accounting transaction. The imposition on such enterprises of the proposed transfer pricing adjustments for UK companies would give rise to accounting transactions that would cause many currently dormant companies to lose that status. The effect would be to require UK groups to prepare a report and accounts for those companies.

The Government have sought to address the issue by providing an exemption from the transfer pricing rules for companies that were dormant prior to the commencement of the new regime. The current

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exemption will not extend to companies that become dormant after 1 April 2004. Many companies cannot be liquidated, whether for tax, name protection or other reasons, and unless the exemption is extended those companies could be brought within the regime and be required to prepare a report and accounts under existing company law rules.

I appreciate that the Inland Revenue's concern is that dormant companies might—I emphasise ''might''—be used as a conduit for transactions that might otherwise be caught by the rules and that that might be inappropriate in some circumstances. Many people believe and have argued—I understand this, although I am no tax expert in this context—that there could be a reserve power to bring such companies within the scope of the rules in tax avoidance cases. I would be grateful if the Minister commented on that because that might solve the problem that has been identified.

Under amendment No. 10, companies that are in insolvent liquidation, administrative receivership or administration would be excluded from the rules. Many people believe that such companies should be excluded and that the obligation to prepare the documentation should be removed for a number of reasons. First, in most cases, those companies will be part of a group and their debtors will also be insolvent and, therefore, unable to make adjustments to, or, for that matter, even to repay, debt that is outstanding at the date on which the process begins. Secondly, an insolvent company is limited by insolvency law in the transactions that it can enter into, and that is relevant. The arm's-length principle at the heart of the transfer pricing mechanism cannot be readily applied in those circumstances. Thirdly, there is a danger that the cost of compliance will fall on creditors, who in such circumstances will already have suffered considerable losses. The idea behind the amendment is to establish the Government's response to the argument that insolvent companies should be exempt.

I hope that with those explanations we can look forward to a positive response from the Minister.

Mr. Burnett: I do not want to repeat the points made by the hon. Gentleman, although I have sympathy with what he asserted. The lack of amendment No. 9 will provide simplicity, but there is no real reason why the benefit of simplification should be significantly denied if we agree to it. To avoid unnecessary compliance burdens, exemption should be available to companies whenever they become dormant. The number of companies that become dormant after 31 March is not likely to be great, and any potential risk to the Exchequer could be eliminated by introducing a clearance procedure as a precondition of exemption for newly dormant companies. That comes to me in a briefing from the Confederation of British Industry. It would enable a smoother and fairer operation of the transfer pricing rules. I shall not repeat the remarks about how difficult it is to debate the subject, given the straitjacket of EU rules. I look forward to hearing

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the Paymaster General's comments on the amendment.

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