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Mr. Dunne : I support the amendment moved by my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond), and echo some of the comments that have already been made by my hon. Friends about the importance of the private equity industry to the economy. I should—probably to the amusement of the Minister—declare another interest, in that I am the director of a venture capital trust that is quoted on the stock exchange. It is a very domestic business—in contrast to the issues that the Bill is trying to reach, which involve primarily offshore relationships.

In this country we have the most effective and substantial private equity industry outside the United States, and each of the funds that raise capital in this
 
13 Jun 2005 : Column 87
 
country does so on a global basis, with which I am familiar, ranging from the United States to Japan, and including Canada and most of continental Europe. Most of those investments are structured through vehicles not designed primarily to evade tax at the underlying corporate investment level. They are efficient structures, designed to allow funds from around the world to come together and support investments made by the fund managers. We should not therefore try to introduce a level of complexity that would drive such transactions into more tortuous structures.

Secondly, increasingly sophisticated measures are being introduced to support companies that have been taken private. I refer not only to mezzanine finance, as referred to by my hon. Friend the Member for Runnymede and Weybridge, but to high-technology companies, some of which are offered distribution agreements by other companies. Some of the insurance companies are involved in providing insurance products, so other financial arrangements may become involved within the transactions, and they might inadvertently get caught by the legislation.

Many of the lenders may not necessarily be banks. In the case of mezzanine finance, for example, they are often banks provided with an equity kicker, which would be caught by the suggested arrangements, but some mezzanine finance is now provided by insurance companies without an equity kicker, through a loan-note structure with a high interest rate, which would not be caught by our amendment because there is not an equity relationship.

The whole picture of private equity in this country is increasingly sophisticated, and by drawing the provisions as the Government have, I fear that they may impose unnecessary and undue burdens on our very successful investment management industry. For that reason, I support the amendment.

John Healey: I hesitated a little before speaking, because I noticed the activity of the Opposition Whip among the Back Benchers earlier, so I wondered whether there were any more Back Benchers with a sudden interest in the particularly narrow provision that we are considering under the schedule. The hon. Member for Wimbledon (Stephen Hammond) and the hon. Member for Ludlow (Mr. Dunne) made a series of points wider than the narrow provisions covered by Amendment No. 16, which might have been more suited to a stand part debate. They paid tribute to the successful venture capital industry in this country, so no doubt they will welcome many of the policies that we have put in place since 1997 to help that—regional venture capital funds, booster venture capital trusts, the enterprise investment scheme, and the 10 per cent. cut in capital gains tax on business assets held for more than two years.

As I have said, amendment No. 16 is narrowly drawn, to narrow the scope of the parties affected by the new transfer pricing rules. As the hon. Member for Runnymede and Weybridge said, to limit the class of persons within the scope of the new rules, the amendment would restrict the extension of the new rules to parties with an interest in the shares of the company involved. However, the chance for interests to act
 
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together to set up abusive financing transactions is not limited to such parties, so narrowing the scope of the new rules in that way would risk opening new loopholes. The new rules have no tax consequences for transactions made on an arm's length basis, so there is no reason why their scope should cause any real problems for ordinary commercial transactions.

The hon. Gentleman was particularly concerned about banks and third-party bank lending. Let me confirm clearly for him that where banks act together in relation to the financing of a business with other persons who control a company, the new rules apply. However, if the bank lends on an arm's-length basis, the tax position will not change. Indeed, businesses should not expect to obtain deductions for costs of debt finance over and above the arm's length amount.

The position with regard to the hon. Gentleman's concern about mezzanine finance with equity warrants is similar. That can be provided, and often is, on an arm's-length basis. There is no reason, as far as I can see, why that should give rise to particular difficulties in applying the new rules, so long as it is provided on an arm's-length basis. A couple of hon. Gentlemen, including the hon. Member for Runnymede and Weybridge, talked about the complex nature of banks' activity and the imposition of these rules. Where banks are just providing an ordinary loan on an arm's-length basis, the work undertaken in the normal course of that lending should be sufficient to demonstrate that. Therefore, the provisions of the schedule are not an additional compliance burden with significant costs for banks, about which the hon. Member for Wimbledon was concerned.

The reason why we are extending these rules—

Mr. Philip Hammond: Will the Financial Secretary talk about the situation in which a bank's corporate lending department is lending and its private equity division is investing? As my hon. Friend the Member for Wimbledon (Stephen Hammond) pointed out, that is not uncommon these days. As the Financial Secretary will know, such matters are dealt with at arm's length in the large banks. What would be the position then?

John Healey: The principle is clear and well established. When lending is done on an at arm's-length basis, the rules do not apply. We are extending the rules in the schedule because some professional advisers are now promoting ways for companies to work around the existing rules and we need to ensure that that will not happen again. I hope that the hon. Gentleman will withdraw the amendments.

Mr. Hammond: The Financial Secretary just said that when lending was on an at arm's-length basis, the rules will not apply, but I think that he meant to say that they would apply but would not have any tax effect, which has been the thrust of his argument. I have listened with interest to my hon. Friends the Members for Wimbledon and for Ludlow (Mr. Dunne) and I am sorry that the Financial Secretary found it necessary to make a churlish remark about the interventions from Opposition Back Benchers. I note for the record that we have not been entertained by any such interventions from Labour Members or, indeed, from the Liberal Democrats who some weeks ago were asking
 
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incredulous electors to consider them a potential real opposition. They have not managed to muster their forces to demonstrate that tonight.

The Financial Secretary understands our concerns. We all accept that no tax consequences will arise for arm's-length transactions that are caught within the scope of the rules, but we find it bizarre to introduce a new regime that will catch hundreds, perhaps thousands, of innocent transactions, placing the burden on the taxpayer to demonstrate that he should not suffer a tax disadvantage. A compliance burden will be placed on business. Why do we find that extraordinary? Because it would be very simple to exclude that group of arm's-length corporate bank lenders from the scope of the rules. The amendment that we have tabled may not be perfect, but I have not heard the Financial Secretary criticise it from a technical point of view. It would remove a significant compliance burden from a large number of transactions and businesses, and he has not demonstrated, to my satisfaction, why it would not be a good idea to introduce such a provision. Therefore, I ask my hon. Friends to support the amendment in the Lobby.

Question put, That the amendment be made:—

The Committee divided: Ayes 177, Noes 289.

Division No. 10 [8.13 pm


AYES

Adam Afriyie
Mr. Peter Ainsworth
Mr. Amess
Mr. Ancram
Mr. Atkinson
Mr. Bacon
Tony Baldry
Gregory Barker
Mr. Baron
John Barrett
Mr. Bellingham
Mr. Benyon
John Bercow
Sir Paul Beresford
Mr. Blunt
Mr. Boswell
Mr. Brazier
James Brokenshire
Angela Browning
Mr. Burrowes
Alistair Burt
Sir John Butterfill
Mr. Cameron
Sir Menzies Campbell
Mr. Chope
Mr. Clappison
Mr. Clifton-Brown
Derek Conway
Mr. Cox
Mr. Crabb
Mr. Curry
David T.C. Davies (Monmouth)
Philip Davies
Mr. Djanogly
Mr. Dodds
Mrs. Dorries
James Duddridge
Mr. Dunne
Mr. Ellwood
Mr. Evennett
Mr. Fallon
Lynne Featherstone
Mr. Mark Field
Mr. Forth
Mr. Francois
Mr. Fraser
Mr. Gale
Mr. Garnier
Mr. Gibb
Sandra Gidley
Mrs. Gillan
Mr. Paul Goodman
Mr. Goodwill
Michael Gove
Chris Grayling
Damian Green
Justine Greening
Mr. Grieve
Mr. Gummer
Mr. Hague
Mr. Philip Hammond
Stephen Hammond
Mr. Hands
Mr. Hayes
Mr. Heald
Mr. Heath
Mr. Heathcoat-Amory
John Hemming
Charles Hendry
Mr. Herbert
Mr. Hoban
Mr. Hogg
Mr. Hollobone
Mr. Holloway
Paul Holmes
Mr. Horam
Mr. Horwood
David Howarth
Simon Hughes
Chris Huhne
Mr. Hurd
Mr. Jack
Mr. Stewart Jackson
Mr. Jenkin
Mr. Boris Johnson
Mr. David Jones
Daniel Kawczynski
Robert Key
Miss Kirkbride
Mr. Greg Knight
Susan Kramer
Mrs. Laing
Mrs. Lait
Norman Lamb
Mr. Lancaster
Mr. Laws
Mr. Leech
Mr. Leigh
Mr. Letwin
Dr. Julian Lewis
Mr. Liddell-Grainger
Mr. Lidington
Mr. Lilley
Peter Luff
Mr. Mackay
Anne Main
Mr. Maude
Mrs. May
Miss McIntosh
Mr. McLoughlin
Patrick Mercer
Mrs. Maria Miller
Anne Milton
Mr. Andrew Mitchell
David Mundell
Dr. Murrison
Mr. Newmark
Mr. Stephen O'Brien
Lembit Öpik
Mr. George Osborne
Richard Ottaway
Mr. Paice
Rev. Ian Paisley
Mr. Paterson
Mr. Pelling
Mike Penning
John Penrose
Mr. Pickles
Mark Pritchard
Dr. Pugh
Mr. Redwood
Mr. Robathan
Hugh Robertson
Mrs. Iris Robinson
Mr. Peter Robinson
Andrew Rosindell
Paul Rowen
Bob Russell
Mr. Sanders
Andrew Selous
Grant Shapps
Mr. Shepherd
Mr. Keith Simpson
Sir Robert Smith
Sir Michael Spicer
Bob Spink
Mr. Spring
Sir John Stanley
Mr. Steen
Mr. Streeter
Andrew Stunell
Mr. Swayne
Mr. Swire
Mr. Syms
Mr. Ian Taylor
Sarah Teather
David Tredinnick
Mr. Andrew Turner
Mr. Tyrie
Mr. Vaizey
Mr. Vara
Mrs. Villiers
Mr. Wallace
Mr. Waterson
Angela Watkinson
Steve Webb
Mr. Whittingdale
Miss Widdecombe
Bill Wiggin
Mr. Willetts
Mr. Roger Williams
Stephen Williams
Mr. Willis
Jenny Willott
Mr. Rob Wilson
Jeremy Wright
Sir George Young

Tellers for the Ayes:

Michael Fabricant and
Mr. David Ruffley


NOES

Ms Abbott
Nick Ainger
Mr. Bob Ainsworth
Mr. Allen
Mr. David Anderson
Janet Anderson
Hilary Armstrong
Charlotte Atkins
Mr. Ian Austin
Mr. Bailey
Vera Baird
Ed Balls
Gordon Banks
Ms Barlow
Mr. Barron
John Battle
Miss Begg
Sir Stuart Bell
Mr. Benton
Roger Berry
Mr. Betts
Liz Blackman
Dr. Blackman-Woods
Hazel Blears
Mr. Blizzard
Mr. Borrow
Kevin Brennan
Lyn Brown
Mr. Nicholas Brown
Mr. Des Browne
Chris Bryant
Ms Buck
Richard Burden
Colin Burgon
Andy Burnham
Ms Butler
Mr. Byrne
Mr. Caborn
David Cairns
Mr. Alan Campbell
Mr. Ronnie Campbell
Mr. Caton
Mr. Cawsey
Colin Challen
Ben Chapman
Mr. Clapham
Ms Katy Clark
Paul Clark
Mr. Charles Clarke
Mr. Tom Clarke
Ann Clwyd
Ann Coffey
Harry Cohen
Michael Connarty
Rosie Cooper
Yvette Cooper
Jeremy Corbyn
Jim Cousins
Mr. Crausby
Mary Creagh
Jon Cruddas
John Cummings
Mr. Jim Cunningham
Tony Cunningham
Mrs. Curtis-Thomas
Mr. David
Mr. Davidson
Mrs. Dean
Mr. Dismore
Jim Dobbin
Frank Dobson
Mr. Donohoe
Mr. Doran
Jim Dowd
Mr. Drew
Mrs. Dunwoody
Angela Eagle
Maria Eagle
Clive Efford
Mrs. Ellman
Jeff Ennis
Paul Farrelly
Mr. Frank Field
Jim Fitzpatrick
Mr. Flello
Caroline Flint
Barbara Follett
Mr. Michael Foster (Worcester)
Michael Jabez Foster (Hastings and Rye)
Dr. Francis
Mike Gapes
Mr. Bruce George
Mr. Gerrard
Dr. Gibson
Linda Gilroy
Mr. Godsiff
Helen Goodman
Nia Griffith
Nigel Griffiths
Mr. Grogan
Andrew Gwynne
Mr. Mike Hall
Patrick Hall
Mr. David Hamilton
Mr. Fabian Hamilton
Ms Harman
Mr. Tom Harris
Mr. Havard
John Healey
Mr. Henderson
Mr. Hendrick
Mr. Hepburn
Mr. Heppell
Stephen Hesford
David Heyes
Keith Hill
Meg Hillier
Margaret Hodge
Mrs. Hodgson
Mr. Hood
Mr. Hoon
Kelvin Hopkins
Stewart Hosie
Mr. George Howarth
Mr. Hoyle
Beverley Hughes
Mrs. Humble
Mr. Hutton
Dr. Iddon
Mr. Illsley
Mr. Ingram
Glenda Jackson
Mrs. James
Mr. Jenkins
Ms Diana R. Johnson
Helen Jones
Mr. Kevan Jones
Lynne Jones
Mr. Martyn Jones
Tessa Jowell
Mr. Joyce
Ms Keeble
Ms Keeley
Alan Keen
Ann Keen
Mr. Kemp
Jane Kennedy
Mr. Khabra
Mr. Khan
Mr. Kidney
Mr. Kilfoyle
Jim Knight
Dr. Kumar
Dr. Ladyman
Mark Lazarowicz
David Lepper
Tom Levitt
Mr. Ivan Lewis
Martin Linton
Mr. Love
Ian Lucas
Mr. MacDougall
Andrew Mackinlay
Fiona Mactaggart
Mr. Mahmood
Mr. Malik
John Mann
Rob Marris
Mr. Marshall-Andrews
Mr. Martlew
Mr. McAvoy
Steve McCabe
Kerry McCarthy
Sarah McCarthy-Fry
Mr. McCartney
Siobhain McDonagh
Mr. McFadden
Mr. McGovern
Mrs. McGuire
Shona McIsaac
Ann McKechin
Rosemary McKenna
Mr. McNulty
Mr. Meacher
Gillian Merron
Mr. David Miliband
Edward Miliband
Andrew Miller
Mr. Austin Mitchell
Anne Moffat
Laura Moffatt
Chris Mole
Mrs. Moon
Margaret Moran
Jessica Morden
Julie Morgan
Kali Mountford
Mr. Mudie
Mr. Mullin
Meg Munn
Mr. Denis Murphy
Mr. Jim Murphy
Mr. Paul Murphy
Dr. Naysmith
Dan Norris
Mr. Mike O'Brien
Mr. Olner
Sandra Osborne
Albert Owen
Dr. Palmer
Ian Pearson
Mr. Plaskitt
Mr. Pope
Stephen Pound
Mr. Prescott
Adam Price
Gwyn Prosser
Mr. Purchase
James Purnell
Mr. Raynsford
Mr. Andy Reed
Mr. Jamie Reed
Mrs. Riordan
Angus Robertson
John Robertson
Mr. Geoffrey Robinson
Mr. Rooney
Mr. Roy
Joan Ruddock
Christine Russell
Joan Ryan
Martin Salter
Mr. Sarwar
Alison Seabeck
Jonathan Shaw
Mr. Sheerman
Jim Sheridan
Clare Short
Mr. Simon
Alan Simpson
Mr. Singh
Mr. Skinner
Mr. Slaughter
Ms Angela C. Smith (Sheffield, Hillsborough)
Jacqui Smith
John Smith
Anne Snelgrove
Sir Peter Soulsby
Helen Southworth
Mr. Spellar
Dr. Starkey
Ian Stewart
Dr. Stoate
Graham Stringer
Ms Gisela Stuart
Mr. Sutcliffe
Mark Tami
Ms Dari Taylor
David Taylor
Ms Thornberry
Mr. Timms
Paddy Tipping
Mr. Touhig
Jon Trickett
Mr. Truswell
Dr. Desmond Turner
Mr. Neil Turner
Derek Twigg
Keith Vaz
Joan Walley
Lynda Waltho
Claire Ward
Mr. Wareing
Mr. Watson
Mr. Watts
Mr. Weir
Dr. Whitehead
Mr. Alan Williams
Mrs. Betty Williams
Hywel Williams
Mr. Winnick
Ms Rosie Winterton
Pete Wishart
Mike Wood
Mr. Woolas
Mr. Anthony Wright
Mr. Iain Wright
Dr. Tony Wright
Derek Wyatt

Tellers for the Noes:

Mr. Parmjit Dhanda and
Mr. Vernon Coaker


Question accordingly negatived.

 
13 Jun 2005 : Column 92
 

Mr. Philip Hammond: I beg to move amendment No. 18, in page 125, line 45, leave out from beginning to end of line 23 on page 126.

Schedule 28 AA of the Income and Corporation Taxes Act 1988 provides that where an interest payment is disallowed or reduced under the transfer pricing rules, thus increasing the tax payable by one party to the transaction, a corresponding adjustment is available to the other party. That is a sensible measure, which avoids double taxation occurring where part of a transaction has been disallowed under the transfer pricing rules.

Sub-paragraph (5) of paragraph 1 inserts a new sub-paragraph (4A) in paragraph 6—not to be confused with the paragraph 4A that we were debating earlier; for some reason everything in schedule 8 relates to a paragraph 4A. The new sub-paragraph (4A) excludes the entitlement to a corresponding adjustment where two conditions are met: first, that the provision subject to the transfer pricing rules is subject to them only as a result of the paragraph 4A introduced by sub-paragraph (3) in paragraph 1; and, secondly, that a guarantee is provided in relation to the security issued by the debtor
 
13 Jun 2005 : Column 93
 
by a person who has a participatory relationship with the debtor. That participatory relationship is defined so as to include the subsidiaries of the debtor.

If A is one of the private equity investor group defined by sub-paragraph (4A) of schedule 28AA as participating in the management, control or capital of B—the acquisition vehicle—and B is both the acquisition vehicle and the debt issuer, it would be perfectly normal in those circumstances for B's obligations as a debt issuer to be guaranteed by its operating subsidiary. To put that in practical terms, the companies generating the cash flow will, typically, guarantee the debt obligations being taken on by the holding company in the form of a raft of cross-guarantees between companies in the group.

The transaction is subject to transfer pricing rules because of the sub-paragraph (4A) to be inserted in schedule 28AA. So, B's interest charge may be reduced or disallowed for corporation tax purposes but, because of sub-paragraph (5), the lender is not entitled to reciprocal treatment, thus reducing its interest receivable for corporation tax purposes.

8.30 pm

Why is that? The question does not arise because we are being a little slow on the uptake. No one, including the body of expert opinion in the City, which considers these matters very closely, is sure of the answer. What is the relevance of the guarantee? Why does the existence of the guarantee relationship between a subsidiary and its holding company invalidate the right to claim a corresponding adjustment in the corporation tax return of the lender where a corporation tax deduction has been disallowed or reduced in the hands of the borrower? What is the abuse that the Government imagine they are addressing by the inclusion of sub-paragraph (5)?

In many cases in which straightforward bank debt is involved, there will be no disallowable interest because the transaction will clearly be at arm's length. However, to rehearse the argument that we had on the last group of amendments, what about banks with an equity participation in the target company? What about banks that have a private equity division or those that have provided an integrated financing package for the company, including equity and debt as an alternative to a conventional private equity investment? On the face of it, those banks will not be able to secure a corresponding adjustment.

For example, when the lending that takes place is not senior debt lending but mezzanine lending—high coupon lending that takes a subordinate security to the senior debt—the correct pricing of that arrangement may not be so clear-cut for it to qualify as an arm's length transaction. I am not talking about a situation in which an equity kicker is attached to the mezzanine funding, but about one in which there is relatively high coupon debt with a subordinate security interest.

It is not clear to us what the mischief is and what the relevance of the guarantee is, but it is clear that the provision must be wrong in principle. The existing provision that allows for an offsetting adjustment on the other side of the transaction when any adjustment is made is a neat and simple double-entry type solution to what could otherwise be a serious injustice. It is clear that, in the absence of an entitlement to an offsetting
 
13 Jun 2005 : Column 94
 
adjustment, these arrangements could give rise to a double tax charge where a partial or total disallowance of interest is made and both parties are within the charge to UK corporation tax.The provision potentially puts UK taxpayers at a disadvantage compared with non-UK taxpayers who will often be able to achieve a corresponding adjustment through a double tax treaty adjustment.

The amendment probes the Government on their attitude to the problem by seeking to delete sub-paragraph (5) in its entirety. I have to say to the Financial Secretary that I have seldom been in receipt of such unanimously perplexed sets of briefing notes from different qualified external advisers. I am sure that he will have seen some of the briefings and noted the genuine perplexity of specialist practitioners in this sector about what the Government are seeking to address, the perceived mischief and the relevance of granting an intra-group cross-guarantee.

I hope that the Financial Secretary will be able to explain all these things, and we will listen carefully to what he says. I assure him that the expert bodies that have expressed mystification will also look closely at what he says to see just how the provisions are intended to work. Are they really intended to apply to group cross-guarantees? Why are they intended to apply to them; what do they seek to address; and how will they work in practice? We will listen carefully to his reply before deciding how we should proceed.

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