Finance Bill

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Dawn Primarolo: In response to the hon. Member for Hertford and Stortford's amendments and to the three points made by him and the hon. Member for Torridge and West Devon, I have to say that the amendments would alter the way in which the rules

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dealing with a special case of securitisation finance worked. In short, where the effect of transfer pricing is to move tax liability from company A to company B, the Bill will allow an election to be made to transfer the tax liability from B back to A. The amendments would allow a group of companies to take a tax liability that had moved from company A to company B and move it to a third company, C. There is no need for such a change. By moving a tax liability back to where it came from, the rule will enable the impact of transfer pricing to be negated within the securitisation structure. It is not necessary to go further than that and to allow tax liabilities to be moved at a group's discretion.

Secondly, the amendments would also remove the Inland Revenue's right of refusal of an election into the scope of the special rule.

Mr. Burnett: Before the Paymaster General goes on to the second point, may I just say that I cannot see what the problem is with the first amendment? The Revenue will get the money and the fact is that it will not allow an election and that provisions can be drawn in if there is any risk that the third company will not pay the tax. If the Revenue is going to get the tax anyway, why bother? Why is the Inland Revenue concerned?

Dawn Primarolo: There is simply no need for such arrangements. As I explained to the hon. Gentleman, there is no need within the questions of securitisation raised by the clause to make arrangements to move tax liabilities to a third company. There is no need for such a change, so why make it? That is what I have been trying to make clear to the hon. Gentleman. No case has been made as to why it would be necessary to go further and to allow the tax liabilities to be moved at the group's discretion. That is how the transfer pricing rules have operated before and that is how we intend to proceed now.

Secondly, the amendments would remove the Inland Revenue's right of refusal of an election into the scope of the special rule, and so remove an important safeguard against abuse of the election. That safeguard is necessary in transferring thin capitalisation rules by taking them out and by using transfer pricing and the special provisions from the Bill for securitisation. No case has been made as to why this or the earlier amendment concerning moving to company C should be allowed. Nobody else has that provision; why should it be necessary in this case?

Thirdly, the amendments propose an election that can be made and accepted by the Revenue after a loan has been issued, but before the tax return is made. Again, the amendments are not necessary. The election to opt into the special securitisation arrangements is automatically effective unless the Revenue opposes it. It concerns the tax liability for a return period and so it is appropriate that it is made on a return. It is effective for the entire lifetime of the loan or loans to which it relates. It is sensible.

The Revenue has published draft guidance on circumstances in which it might refuse an election. They are circumstances in which the arrangements are a sham or might lead to loss of tax. In other cases, I

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can confirm that the Revenue will discuss prospective arrangements with the group and will give a reassurance where possible that an election will not be opposed. Therefore amendments Nos. 13 to 24 are not necessary: some are undesirable and others are unjustified. If the hon. Member for Hertford and Stortford decides to push his amendments to a Division, I will ask my hon. Friends to oppose them.

5 pm

Mr. Burnett: I shall endeavour to pick up the challenge on clause 36(2) and who can make the appropriate election. These transactions are often complex and often involve groups of companies. The answer to the Paymaster General's question is that if one has a group of companies one wants an election to be made by the company that will bear the tax. There is no reason why that should not be possible. Provided that the company is in a position to meet those tax liabilities, the Revenue has nothing to lose. These matters are complex. The corporate structures themselves are complex. A little bit of flexibility is being requested to enable the market to function more satisfactorily.

Dawn Primarolo: I do not agree with the hon. Gentleman. He still has not made the case. The Bill will put tax liability back where it would be in the absence of the transfer pricing rules. That is sufficient to ensure that transfer pricing changes do not adversely affect securitisation. There is no need to go any further, as the amendment seeks to do, which is why I ask the Committee to reject it.

Mr. Prisk: It has been useful to table these probing amendments to try to elicit from the Minister a greater understanding of the Government's thinking. The benefits that might accrue in these circumstances are limited. The hon. Member for Torridge and West Devon has rightly added to the issue by trying to tease that out. While I understand that in one or two circumstances there is a legitimate risk about which the Revenue may have concerns, I am not entirely convinced by the Minister's argument as to the distinction between disadvantaged and other parties being able to participate or about the potential retrospectivity of the elections being revoked. That is a cause for concern.

This will be only the beginning of the debate on the securitisation. The Minister has not responded thoroughly enough to the wrinkles and problems addressed by the amendments, but they are probing amendments and I will not press them to a vote.

Amendment agreed to.

Dawn Primarolo: I beg to move amendment No. 80, in

    clause 36, page 41, line 14, at end add—

    '(4) After paragraph 7C insert—

    ''Guarantees etc: election to discharge tax liability instead of making balancing payments

    7D (1) This paragraph applies where the following conditions are satisfied—

    (a) both of the affected persons are companies,

    (b) the circumstances are as described in paragraph 6(1) above,

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    (c) the actual provision falls within paragraph 1B(1) above.

    (2) Sub-paragraphs (2) to (8) of paragraph 7B above apply in a case where this paragraph applies as they apply in a case where that paragraph applies, but with the modifications in sub-paragraphs (3) and (4) below.

    (3) The relevant security is the security in paragraph 1B(1)(a) above.

    (4) In sub-paragraph (4) (nature of the election)—

    (a) for ''paragraph 7A above'' substitute ''paragraph 7C below'';

    (b) for ''paragraph 1A'', in both places, substitute ''paragraph 1B''.''.'.

The amendment extends the range of circumstances in which special provisions for securitisation may apply. It is made following representations received since the publication of the Bill. Thin capitalisation restrictions can apply to loans made between two connected companies or they can apply to loans from independent lenders if the loan is guaranteed by a connected company.

The Bill allows a securitisation rule to apply only where a transfer pricing adjustment is made to a loan made between two connected companies, and not to guaranteed loans. As I said, the amendment has been tabled following representations made since the Bill was published. Those representations concern circumstances in which thin capitalisation rules might apply to a guaranteed loan from an independent lender in the context of a securitisation, and might affect the rating of bonds issued under the securitisation. The amendment will allow the special rule to apply to such a loan, subject to the other conditions in the clause. The amendment therefore provides further protection for existing and future financing arrangements, and I commend it to the Committee.

Amendment agreed to.

Clause 36, as amended, ordered to stand part of the Bill.

Clause 37

Commencement and transitional provisions

Mr. Prisk: I beg to move amendment No. 26, in

    clause 37, page 41, line 36, leave out '6th' and insert '1st'.

The Chairman: With this it will be convenient to discuss Government amendments Nos. 81 and 82.

Mr. Prisk: Amendment No. 26 would correct what I believe to be a potential error in the transitional provisions: line 36 of the clause refers to 6 April 2004, but it should refer to 1 April 2004. If it does not, the transitional provisions will not operate correctly for periods of account beginning on or after 1 April. I am aware of the Government's amendment, but it relates to a line further down. However, the fact that they have tabled the amendment suggests that the mention of 6 April was intentional, so I look forward to hearing the purpose behind that.

Dawn Primarolo: I am grateful to the hon. Gentleman for proposing a change to the commencement provisions in order to improve the

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consistency of their application. However, his amendment would make the commencement date different from the start of the assessment year. The year of assessment starts on 6 April, in contrast to the financial year, which begins on 1 April. However, Government amendments Nos. 81 and 82 would achieve the same objective as amendment No. 26, but in a way that keeps the introduction of the new rules as simple as possible by aligning the commencement date with the start of the assessment year. In those circumstances, I ask the hon. Gentleman to withdraw his amendment and count this debate as a score draw. I commend the Government amendments to the Committee.

Mr. Prisk: Minor victories have to be taken when possible. I must confess that when I read the Government amendments, I was even more bamboozled than before as to what was right and what wrong. While I am momentarily ahead, I will take the good advice and beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 81, in

    clause 37, page 41, line 41, leave out '31st March' and insert '5th April'.

No. 82, in

    clause 37, page 41, line 42, leave out '1st' and insert '6th'.—[Dawn Primarolo.]

Clause 37, as amended, ordered to stand part of the Bill.

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