Column Number: 175
Standing Committee A
Thursday 13 May 2004
[Mr. John McWilliam in the Chair]
(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289,
and schedules 1, 3, 11, 12, 21 and 37 to 39)
Mr. Quentin Davies (Grantham and Stamford) (Con): On a point of order, Mr. McWilliam. I realise that you were not in the Committee this morning, but at the end of our proceedings on clause 51 I raised a point with the Economic Secretary about the interpretation of subsection (4). He replied after a moment's hesitation that the matter had been dealt with on Tuesday, when I was not in the Committee, and had I been present, I would have known about it. He got a slight cheer from some of his supportersI do not know whether it was a cheer of relieffor having said that and for so elegantly disposing of the problem. However, I made use of the lunch hour to check the Hansard for Tuesday and can find no explanation of the point that I raised this morning. It was not even raised, let alone answered.
Not only was the Committee bluffed, if I may use parliamentary language on this occasion, but the public were deprived of an explanation. Nobody, not even the Economic Secretary, denied that the point was worthy of explanation; indeed, his reply this morning indicated that it needed elucidation. I wonder whether it might be in order for him to revert to that point and give me an explanation, which I am sure exists and which needs to be set out publicly if those who send us to Parliament are to understand that aspect of the Bill.
The Chairman: I am constrained by Standing Orders, which tell me that the Committee has disposed of clause 51. However, it has not been disposed of finally; that is, there will be an opportunity to raise points about it at other stages that the Bill will go through, such as Report, and in another place. However, that opportunity does not exist here and now.
Amendment of enactments that operate by reference to accounting practice
Question proposed [this day], That the clause stand part of the Bill.
Question put and agreed to.
Clause 52 ordered to stand part of the Bill.
Column Number: 176
Amendment of enactments that operate by reference to accounting practice
The Chairman: I apologise for putting the question on clause 52 as I did earlier. I had a good lunchnot a particularly alcoholic one.
We now come to schedule 10. The question is that schedule 10 be the Tenth schedule to the Bill.
The Economic Secretary to the Treasury (John Healey): I am glad to hear that you had a good lunch, Mr. McWilliam. I trust that other members of the Committee did as well. Half my KitKat is outside in the Corridor.
At the risk of testing your patience, Mr. McWilliam, may I just double back and say to the hon. Member for Grantham and Stamford (Mr. Davies) that I tried to explain this morning that clause 51(4), which he was querying, contains standard wording in respect of transfer pricing? Transfer pricing was dealt with in a previous part of the Bill. As he said, the detail did not come up because the wording is an established standard. However, if it will help him, I will write with the detailed explanation that he seeks of that standard provision and formula.
Mr. Davies: I am grateful to the Economic Secretary for that assurance and for his acknowledgment that I was right in saying that the matter had not been raised on Tuesday. We have set the record straight.
However, as a matter of principle, the fact that wording is standard should not mean that it is not open to challenge during annual passage of the Finance Bill. The whole purpose of this exercise, which you, Mr. McWilliam, and many colleagues who are more distinguished than I spend many hours on every summer, is to expose to public scrutiny and debate the Taxes Acts. As it is the only opportunity that we have to do so, it would be contrary to the role of Parliament if the notion that is implicit in what the Economic Secretary just said were to become accepted in this Committee that, because a piece of wording is standard, it is no longer open to challenge or even subject to explanation by the Government.
The Chairman: Order. That intervention was a bit long. The hon. Gentleman knows well that we are not on clause 51, because we have dealt with it. It is a matter for the members of this Committee, or at later stages, the Members of either House, to seek to amend any legislation in any way they like, provided that it is in order in the context of the legislation.
John Healey: If I may, I will address schedule 10, which accompanies clause 52. The schedule makes a number of detailed technical changes to the legislation about the tax treatment of debt and securitiesthe loan relationships legislationand about derivative contracts, intangible fixed assets and currency accounting. The hon. Member for Arundel and South Downs (Mr. Flight) raised a number of points on the clause and, as he said, they probably need to be the subject of detailed discussion with the Revenue.
Column Number: 177
Indeed, the points that he raised are already the subject of discussion with the Revenue under the consultation arrangements that I explained earlier.
The Chairman: Order. I think that we may have been sidetracked a bit by the point of order. Although the Economic Secretary is addressing schedule 10, he is supposed to be moving amendment No. 90. We cannot deal with the schedule until we have dealt with the amendment.
John Healey: I beg to move amendment No. 90, in
schedule 10, page 317, line 1, leave out '93A(3)' and insert '93(3)'.
The amendment corrects a typographical error. I trust that the Committee will accept it.
Amendment agreed to.
Question proposed, That this schedule, as amended, be the Tenth schedule to the Bill.
John Healey: The points that the hon. Member for Arundel and South Downs raised are already being discussed with the Revenue, but I suspect that he would appreciate a general indication of their merit. He asked whether credits and debits were the wrong way round in the relevant area of the schedule. He and his advisers may well have a point. We will consider the matter more closely and see whether it can be dealt with in guidance, or whether an amendment will be necessary.
The hon. Gentleman asked what would happen if a company with a dollar functional currency incurred a trading loss. The short answer is that the loss would be carried forward in dollars. That point has already been explained to the Law Society. I reassure the hon. Gentleman that the points that he raised will be covered in discussions with the Revenue.
The schedule is a long one and is being discussed in detail with the industry and the professional bodies. In summary, it modernises the interaction of tax and accounting. It allows the concepts and methods of accounting used in the international accounting standards to be followed for tax. It retains existing rules where they perform a useful function, and where IAS may give inappropriate results compared with current tax treatments.
Mr. John Burnett (Torridge and West Devon) (LD): This is just a small cosmetic point. If debits and credits are wrongly referred to in the draft, we should make sure that we get the primary legislation right, rather than dealing with that superficially in the guidance. We should be taxed not by Revenue fiat but in accordance with the law.
John Healey: I give way to the hon. Member for Arundel and South Downs.
Mr. Howard Flight (Arundel and South Downs) (Con): I was going to make the same point in a different way. To the extent that there are places where the drafting needs changing, I hope that the Economic Secretary will confirm that the Government will
Column Number: 178
propose amendments and not simply rely on guidance notes for the interpretation of basic law that may be wrong.
John Healey: The hon. Gentleman may not have heard me correctly. I explained that we will consider whether the matter can be dealt with in guidance or whether an amendment is necessary. If it is necessary, we will certainly introduce an amendment. I place just as high a premium on getting the primary legislation right as he does.
Finally, the schedule smoothes the transition from existing UK generally accepted accounting practice to IAS, and the revision of UK GAAP based on IAS. The schedule is welcomed by business. It reduces compliance costs by allowing accounting practices to be followed more closely for tax. I commend it to the Committee.
The Chairman: Order. I will just let hon. Members know my intentions. If there is a vote, I will suspend the Committee for 15 minutes. In any event, I intend to suspend the Committee at or about 5 o'clock, because although members of the Committee may drift in and out, we must have consideration for members of staff[Interruption.] Good Lord, I could have got burnt at the stake for that in the middle ages.
Sitting suspended for a Division in the House.
The Chairman: I suppose I should say, belatedly, that gentlemen may remove their jackets. As I was saying, before I was rudely interrupted, it is my intention to suspend the Committee for half an hour at 5 o'clock or thereabouts, because the staff will need a break, and then resume again.
Question put and agreed to.
Schedule 10, as amended, agreed to.
Treatment of expenditure on research and development
Mr. Flight: I beg to move amendment No. 98, in
clause 53, page 59, line 15, at end insert
'such that deductions are available as and when the expenditure is incurred.'.
Mr. McWilliam, I welcome you to the Chair this afternoon. It has been assumed that the purpose of clause 53 is to put relief for research and development on an incurred basis, which was contemplated and referred to in the Budget press release. However, it is not entirely apparent that that purpose is achieved by the clause, which disapplies intangible fixed assets legislation. There seems to be an underlying assumption in the clause that, in the absence of that legislation, a deduction is obtained on an incurred
Column Number: 179
basis, which is not necessarily always the case. The Minister will be aware of the case of Gallagher v. Jones.
Outside the intangible fixed asset rules, generally accepted accepting practice is imposed, as distinct from the incurred basis. As a result of clause 50, which we debated earlier, GAAP will be in respect of IAS in companies that prepare accounts in accordance with IAS. It seems that clause 53 will not achieve anything. Our amendment is designed to address that problem and is consistent with some of the points raised by the Chartered Institute of Taxation. It goes further, and states that it is unsatisfactory to reintroduce the traditional tax capital revenue distinction, which is well known to be imprecise in its effects, in clause 53. While that may be the case, the distinction is currently ingrained in British tax law, and the Economic Secretary may comment on the difficulties faced in applying the test, but we still feel that an amendment is necessary.
The related point has been made as to whether the intention is to preserve existing UK GAAP in the timing of deductions for research and development expenditure, or whether such deductions should be made on an incurred basis, the effects of which would not be the same, but are not that different.