Mr. Davies: Am I right in summarising the answer that the Minister is giving me thus: the danger that I have outlined exists; a strategic stake such as I described would indeed be taxable on the relevant basis; but he intends to wait to see how great the effect will be in practice before deciding whether he needs to do something about it?
John Healey: That is basically a fair summary. I was making the point about being able to make a clearer judgment after 1 January. I remind the Committee that the schedule contains a power to make regulations with respect to the case in question, if they are needed. We shall monitor the situation closely.
The hon. Members for Grantham and Stamford and for Arundel and South Downs suggested, as I believe the Chartered Institute of Taxation did, that what is happening might introduce an unwarranted and unwanted element of volatility into the computation of taxable profits. In our judgment that is not so. The rule ensures that a company dealing in shares will not be able to escape taxation by designating its portfolio as available-for-sale assets under international accounting standards or the revised UK GAAP. It applies only to those companies
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that are already taxed on a fair-value or mark-to-market basis in respect of their portfolios of shares. It is difficult to see how it introduces a new element of volatility.
Clause 54 does not cover or relate to debt equity swaps, securitisations or other loans.
Mr. Davies: It is reassuring, in a sense, to hear that the second and third of my examplesdebt equity swaps and securitisationwill not result in any difference in the taxation regime applied to the relevant institutions. However, I must ask why not. It seems to me that they are assets available for sale. What assurance do we have that there will indeed not be a change in the taxable profit?
John Healey: The short answer is that the clause is drafted in such a way that it is not relevant.
Question put and agreed to.
Clause 54 ordered to stand part of the Bill.
Duty of company to give notice of coming within charge to corporation tax
Mr. Flight: I beg to move amendment No. 110, in
clause 55, page 61, line 1, leave out 'three' and insert 'six'.
As hon. Members will know, the clause is about new companies being required to notify the Revenue within three months of their first accounting period. In the past, if companies have not been sent a corporation tax return, they have been obliged to notify the Revenue within 12 months of the end of their accounting period. That could amount to 24 months after the start of the business.
In practice, the Revenue has traditionally found out from the registrar of companies when new companies have formed. Each new company has been sent a form to complete, requesting basic tax information and other details such as when the company started and who the directors are. It was not a statutory return and could be ignored without penalty, but if it was ignored the Revenue's practice was to assume, provisionally, that the first accounting period would run for 12 months from the date of incorporation, and a return would be required accordingly.
By way of a description of the changes under the clause, the Revenue's Budget notice document ''Protecting Revenues'' stated that
''the requirement for newly incorporated businesses to disclose basic tax information will be strengthened''.
What is actually introduced is an obligation for the companies to tell the Revenue in writing that an accounting period has commenced because they have come within corporation tax for the first time, and notification has to be given within three months of commencement. The obligation is underpinned by the threat of a penalty of up to £300 for initial failure and £60 per day for continued failure. As with other comparable penalties, they can be avoided with a reasonable excuse, but ignorance is not one of them.
The provision is reasonably straightforward, although unincorporated associations and clubs that are subject to corporation tax have been excluded. Will the Economic Secretary confirm that the arrangements also apply to dormant companies? Are they related to incorporation or to coming within the charge? In either event, the provision needs significant publicity as many people buy companies via the internet and may be unaware of it. There should be some form of reminder issued automatically.
The Chartered Institute of Taxation, which we are inclined to support, believes that the notice period of three months within which an entity must give notice of falling within the charge to corporation tax is rather short, and we see no reason why the requirement to notify should not be replaced with a requirement to file or with a longer period. We would expect tax legislation to impose less stringent requirements on companies moving into the corporation tax system on the grounds that they are naturally less familiar with the rules and with their obligations.
It is tempting to think that the Treasury has seen another nice little earning opportunity and that, as with self-employed notification where the £100 penalty has been quite a successful source of money because of people not meeting the timing requirement, the same thinking is that the provision may be a not unworthwhile source of income.
Amendment No. 110 would extends the time for giving notice to six months.
Mr. Michael Jack (Fylde) (Con): In following the argument made by my hon. Friend the Member for Arundel and South Downs, will the Economic Secretary clarify one or two points when he replies? There is at least a verbal inconsistency between the explanatory notes on the clause and the way in which it is drafted.
The amendment would provide a longer period for a company to respond to its obligations. The clause says that the company
''must give notice to the Board of the beginning of its first accountancy period''.
It seems clear that when a company comes into existence it must identify itself to the Revenue. The explanatory notes state:
''It places a statutory obligation on companies to notify the Board within 3 months of when they first come within the scope of''
If one had an enterprise and the business plan said that for the first 12 months the company was going to make a loss, it would not be unreasonable for the owners to say, ''Well, we won't incur a corporation tax liability, so there's no need for us to notify anybody of our existence.'' It becomes relevant only if the loss accumulates and carries over into a second accounting or tax period and the business moves into profit. It then becomes liable for payment of corporation tax on the normal basis, but equally to utilise its losses. The company then engages with the mechanism of corporation tax.
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To avoid doubt, if someone believes that their business will not have a real world liability, does the clause means that they will have to pay corporation tax to the Revenue, because that is what the explanatory notes suggest?
John Healey: I shall ask the hon. Gentleman to consider withdrawing the amendment, which relates to a narrow point, and ask the Committee to reject it if he chooses not to do so.
The amendment would frustrate the object of the new requirement in the clause for early notification and the provision of information to the Inland Revenue, so that the Revenue can ensure compliance with a wide range of company obligations and offer timely help and support.
The hon. Member for Arundel and South Downs and the right hon. Member for Fylde (Mr. Jack) made a couple of broader points and asked a couple of broader questions. I should say that the clause is intended to ensure that companies that come within the charge to corporation tax comply with their obligations from the outset. A company will usually come within the charge to corporation tax when it starts a business.
Details of newly active companies are important for tax compliance purposes at the point at which they come within the charge to corporation tax. Equally importantly, the new requirement will enable the Revenue to make earlier contact with companies to offer help and support. I trust that all members of the Committee accept that helping businesses to get it right is much better than having to put things right later if they go wrong.
The clause therefore places a statutory obligation on companies to notify the Revenue within three months of their first coming within the charge to corporation tax, and within three months of coming back into the charge to corporation tax following a period of dormancy. I will answer the question asked by the hon. Member for Arundel and South Downs on dormancy in a moment.
The obligation requires a company to provide details of the company, its activities and directors. Precise details of the prescribed information are contained in the draft regulations that I circulated to the Committee earlier this week, which were also published yesterday on the Inland Revenue's website.
Mr. Flight: To some extent, I like things to be cut and dried, but it strikes me that reasonably naive new entrepreneurs will not have a clue about this unless they are all well organised by their accountants. Three months also go very quickly. If I were in that situation, I would certainly find it extremely annoyingas annoying, say, as receiving a parking ticket when one is a minute or so lateto find that I had been given a fine that was building up. It is good Germanic order to have this period of three months, but the number of companies that may not comply out of ignorance may be rather more than one might expect.
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John Healey: All newly incorporated UK companies will receive information about the requirement soon after they set up. They will also be able to obtain advice and support from the Revenue. We will publicise the provision very widely, and will certainly consider any need for additional publicity as the provisions bed in. To summarise the more general points, it is important that the Revenue can ensure compliance with tax obligations by all businesses, including companies, right from the start of their business lives.
These arrangements would apply only to companies with a corporation tax accounting period, not to dormant companies. They therefore apply only to new companies or to companies that have restarted in business after a period of dormancy.
The amendment would create an asymmetry in the obligation to notify between the self-employed and incorporated businesses. It would be three months for the former and six months for the latter. The need for early notification is the same for all kinds of business, irrespective of their legal form. It would be an odd result if the same business were to be subject to a three-month requirement while self-employed, but to a six-month requirement if it incorporated.
The three-month time limit is not unreasonable. The first accounting period begins when a company comes within the charge to corporation tax, by which time all the information required will almost always be available. In the rare case when a company may have some doubt about the time of the start of its first accounting period, measures of protection are built into the clause, in particular the reasonable excuse provisions. Those prevent the levy of a penalty where a company has made a genuine mistake and rectified it at the earliest possible opportunity. It is unlikely that a company faced with such uncertainty would be any better off after six months rather than three.
On that basis, I hope that the hon. Member for Arundel and South Downs will consider withdrawing the amendment, and if not I shall have to ask my hon. Friends to oppose him.