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I have a degree of experience. I have worked as an auditor and with companies in preparing their accounts, so I understand why the exercise is not straightforward or quick. My problem with the way in which the Government have introduced the Marks and Spencer judgment in schedule 1 is that without a gap between the year-end and the filing of the claim it would be virtually impossible for any business to submit a robust claim that would withstand scrutiny from Her Majesty’s Revenue and Customs. I hope that the Treasury will acknowledge that the process of making a group relief claim is not straightforward.
The Marks and Spencer judgment, which involves a company making a group relief claim in relation to losses incurred in another EEA country, adds a further layer of complexity. Where there is any prospect of losses incurred in EEA territory being carried forward against profits, the losses cannot be claimed, so a business will have to have made decisions about the future of that loss-making company—it may have had to close it during the course of the year, or it may plan to close it down in the next accounting period.
Where there is any prospect of such losses being offset against future profits, the losses cannot be claimed through group relief against the profits of a UK company. More time will be required for businesses to make those claims, a more thorough investigation will be required and the process will be longer. One cannot simply press a button in an overseas territory at the end of the financial year and produce perfectly formed accounts and a group relief claim.
Rob Marris (Wolverhampton, South-West) (Lab): The hon. Gentleman is the accountant, not me, but he may have misread the provision that he seeks to amend. He has referred to distinguishing between a year-end point and the time for filing a claim for that year-end. Amendment No. 122 refers to the filing of the claim part of the process, whereas I read paragraph 7(4) as dealing with the end of the current period, when the picture is taken—as he has said, the figures are put together afterwards through a long process. By my reading of the provision—I may be wrong—he is confusing apples and oranges.
Mr. Hoban: We debated that point in Standing Committee, where I felt that the Government shared my interpretation of when the claim would be made, so it would be welcome if the Economic Secretary were to clarify the position. The message that I have received in talking to advisers in the field is that the timing of the claim is so tight that it renders impossible the making of a group relief claim. A number of people involved in the area are concerned that the time for making a claim is so tight that it renders a group relief claim practically impossible. The consensus in the sector is widespread, but if the Economic Secretary were to reassure the accountancy profession and business, that would be welcome. The situation is not clear at the moment in the eyes of companies and their tax advisers, which is one reason why the amendment was tabled today.
In his judgment, Mr. Justice Park considered the timing of the claim and examined various possibilities. It is important that companies can make such claims and that the right conferred upon them by the ECJ judgment is not rendered impossible to exercise in practice, which is why we have re-introduced the amendment on Report. I was concerned that the answer given by the Financial Secretary in Committee did not address the issue properly, and I want to use the debate on Report to clarify the matter for the sake of those who must implement the provision.
The Economic Secretary to the Treasury (Ed Balls): I hope that I can provide the reassurance sought by the hon. Member for Fareham (Mr. Hoban) and those whom he has consulted in recent weeks.
I have re-read the Hansard of the debate in Committee, where we had an interesting and wide-ranging discussion about the role of the ECJ and European decision making in UK tax law and considered the almost philosophical issues around tax policy. However, the hon. Gentleman has raised some particular points, which I shall address in a particular way.
As the hon. Gentleman has said, clause 27 and schedule 1 provide for a small extension to the group loss relief rules for companies. That extension allows UK groups to claim corporation tax relief for foreign losses in very limited circumstances. Existing group relief rules for UK losses, including the timing period, which business is keen to retain, are unaffected by the proposed legislation. We are introducing this small extension to group relief following last December’s judgment of the ECJ in the case of Marks and Spencer plc v. Halsey, which set the conditions under which group relief should be extended to foreign losses. Those conditions are very restrictive, which was the intention. Indeed, the way in which members of the European judiciary reflected legal opinions made it clear that the conditions are to be applied in extremely restricted circumstances.
Amendments Nos. 15 and 122 go beyond the judgment and relax one of the conditions under which extended group relief is available. The condition is that to be eligible for relief in the UK, there must be no possibility of relieving a loss in a future period in another state. The amendments would change the date by reference to which companies determine whether that possibility exists. The reference date is currently
immediately after the end of the loss period, but amendment No. 15 would change that to the date on which the group relief claim is made by a UK company. Amendment No. 122 would change the reference date to the earlier of two years after the end of the accounting period or the deadline for filing corporate tax returns of the foreign loss-making company, whichever is earlier.
On amendment No. 15, as my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) has said, there is no logic in tying the test of possibility of relief to the rules that apply in respect of claims, because the concepts are entirely separate. The claims rules apply to the claimant company, while the possibility of relief rule applies to the losses of the surrendering company, and there is no logic in trying to create an entirely forced link between the two. We are talking about the definition of the loss period and the point at which the decision is made; we are not talking about the timing of the claim. The claimant company will still have at least two years to claim relief, which exactly mirrors the current relief rules for UK group relief. The difference is that at the time of the claim, the claimant company must look back to the date immediately after the loss period to see whether there is any possibility of relief at that time. As I have said, we are discussing the loss period, not the claim period.
Mr. Hoban: Does the Economic Secretary require the loss-making company fully to assess the quantity of its losses immediately after the end of the accounting period?
Ed Balls: As I have said, the company has a two-year period to make a claim. The issue is the date at which the losses from the foreign company are judged to be unrelievable in the foreign tax jurisdiction. Once that date is decided, there are two years in which to make the claim. We are in danger of confusing two different concepts—the two-year claim period and the loss period, which relates to the tax year when the decision on unrelievability was made. There will still be two years for that assessment to be made and for the relief to be claimed back in the UK tax jurisdiction and against UK profits. The idea that an immediate assessment calculation will subsequently have to be delivered to the Revenue at a particular point in time is not in line with what we are seeking to do. The claimant company will have at least two years to claim relief, mirroring current rules for UK group relief. As I said, the difference is that at the time of the claim the claimant company must look back to the date immediately after the loss period to see whether there is any possibility of relief at that time. It is true that Mr. Justice Park decided in his High Court ruling that the relevant time was the date on which a claim was made by the UK-resident company. However, that is not a settled point; it is still subject to appeal. His judgment also considers past claims to group relief, whereby the current legislation sets out the rules that are to apply to claim periods after 1 April 2006.
Amendment No. 15 would provide a fiscal and financial incentive to delay claims until the last possible minute. Moreover, since the ability to claim can depend
on whether an inquiry is open, companies would have an incentive not to settle inquiries. Those factors would sit uneasily with the Government’s compliance objectives and with businesses’ oft-repeated requests for certainty.
Amendment No. 122 would make the relief more generous than that in the Bill by effectively giving access to up to three years’ worth of losses rather than one. That would go beyond the ECJ judgment. Moreover, it would substantially increase the extension’s cost to the Exchequer, from the £50 million estimated in the Budget documentation to £150 million. That is not a concession that we seek to make, nor is it necessary given the distinction between the claim period and the loss period. The amendment could facilitate a form of loss shopping, with companies putting their losses into the state with the most generous filing deadline. It would also cause many practical problems for business and for Revenue and Customs, as filing dates vary from country to country.
In short, both amendments would remove important protections in the Bill at substantial cost to the Exchequer. I agree with my hon. Friend the Member for Wolverhampton, South-West that the concerns of the hon. Member for Fareham are based on a confusion between two different concepts. I hope my remarks enable him to assure his friends in the industry that their concerns are not justified and to withdraw the amendments.
Mr. Hoban: I am grateful to the Minister for putting on the record his clarification of the important point about the timing of the claim that people can make and its being in line with UK group relief rules.
One outstanding issue remains. At the end of the accounting period, the overseas company must be aware of its current position and its ability to offset losses that it has incurred against profits of other group companies in the same territory, as well as whether there is the prospect of relieving those losses against future profits to be made. That is a difficult issue, because if there is any prospect whatsoever of profits being made in the next accounting period—for example, if some trading is still taking place—the losses cannot be relieved. If, however, a business has taken the decision to close during the accounting period, at the accounting period end it will know that there is no future prospect of relieving those profits. That issue of how much knowledge a business must have at the end of an accounting period is problematic. It leads to a difficulty in applying the ECJ judgment. It is in line with the Government’s strategy of applying the most restrictive interpretation of the ECJ judgment. I suspect that companies may wish to return to it in future.
Given the Minister’s confirmation of the date of the filing deadline, and notwithstanding my concerns about information that a business must have at the end of the accounting period to determine whether it can carry forward losses and whether they are available for relief elsewhere, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
2.45 pm
Amendment proposed: No. 98, page 171, line 40, leave out ‘partly’ and insert ‘mainly’.— [John Healey.]
Mr. Deputy Speaker (Sir Michael Lord): With this we will take Government amendments Nos. 21, 24, 25, 26, 22 and 23.
Mrs. Theresa Villiers (Chipping Barnet) (Con): I turn first to the Government amendments in this group on taxation of leases—amendments Nos. 21 to 26. Government amendments Nos. 24 to 26 provide some useful technical clarification of schedule 8, which introduces a completely new framework for the taxation of leases, in relation to the backdating of the provisions. The Opposition have no objection to those amendments being made.
I particularly welcome amendments Nos. 21 to 23, since they are virtually identical to amendments which I tabled in Committee and which the Financial Secretary graciously said that he would look into. In three places, the Bill imposes a motivation test. The formulation usually adopted in anti-avoidance legislation asks whether the purpose, or one of the main purposes, of entering a relevant transaction is that of obtaining a tax advantage. By contrast, under schedule 8 it is sufficient if the Revenue can show that the circumstances of the case are such that it would not be unreasonable to conclude that the purpose of entering the transaction is to gain the tax advantage. Under the traditional formulation for motivation provisions, it is for the Revenue to prove its case in court—that is, that obtaining the tax advantage was the purpose of entering the transaction. It would have to prove that on the balance of probabilities, according to the normal civil standard of proof. However, under the formulation chosen in schedule 8, the Revenue would no longer have to prove that tax avoidance was one of the motivations—it would have only to show that it was not unreasonable to reach that conclusion. That seems to allow for the possibility that the Revenue might succeed despite failing to show that the actual purpose was to obtain a tax advantage, if it could show that it was not unreasonable to conclude in the circumstances that that was the motivation. It would then be up to the taxpayer to show that the relevant tax inspector’s decision was unreasonable in the circumstances. That alters the ordinary onus of proof and therefore gives rise to significant problems.
I am grateful that the Financial Secretary has reviewed the matter and decided to remove the formulation that I mentioned and return to a more orthodox approach that requires the Revenue to prove that tax avoidance was the motivation. I hope that that change of approach by the Government will be reflected in future and that the “not unreasonable in the circumstances” formulation does not become the norm in tax law. That was one of the main anxieties raised with me by organisations such as the Law Society, which was concerned not only about the
impact of this measure in terms of the taxation of leases but about the possibility of its becoming the standard form for drafting anti-avoidance provisions.
I am positive about the Government’s amendments to schedule 8, and I need only delay the House with a few remarks on the schedule. The Opposition still have serious reservations about the new framework for the taxation of leases. Although it is improved by the Government amendments, we are concerned that the abolition of tax incentives for leasing environmentally friendly equipment could harm the battle against climate change. The administrative costs of proposed new section 70Q(2)(d)of the Capital Allowances Act 2001 could be excessive, with lessees forced to establish the tax position of their immediate lessors and superior lessors; and, if they are overseas companies, their theoretical position in UK tax law, had they been subject to UK taxes. That could be a complex process and is not one that is required by the needs of the Revenue.
There is a danger that the new provisions on the taxation of leases could interact negatively with the tonnage tax regime. Overall, we are concerned about the considerable complexity of the new rules in schedule 8. We are worried about the impact that the changes could have on the leasing industry, which plays an enormously important role in UK business investment and fixed capital formation. The Finance and Leasing Association has reported that its members provided the finance in about a quarter of all fixed capital investment in the UK in 2004, involving some £93 billion in new business.
The outgoing leasing rules have proved attractive to foreign direct investors, so their loss might be expected to remove an important incentive to bring business to the UK. We also believe that the shift of capital allowances from lessor to lessee, which is at the heart of schedule 8, will push up costs for the public sector. The NHS in particular has benefited in recent years from reduced costs in leasing equipment, because it can pass on to lessors the tax allowances on those leases which, as a non-taxpayer, it cannot use itself.
We hope that the Government will keep the new framework for the taxation regime for long-funding leases under review and monitor its impact on the three areas that I have outlined, namely business investment, the public sector and overseas investment in the UK. We also hope that they will consider seriously the options for simplification, and that they will continue to consult the market participants affected by these rules closely, because of the key role that the leasing industry plays in business investment, and hence in productivity in the economy.
We acknowledge, however, that the Government have conducted a lengthy and detailed consultation with the industry on these matters, and that they have removed a number of the problems that initially arose from their draft proposals. So as well as graciously conceding an important point today, they have taken steps to remove several difficulties that were present in the earlier drafts.
My comments on Government amendment No. 98 will be even more brief. The provision relates to schedule 5 and the Government’s new framework for film tax, and it seems to provide a sensible, albeit
minor, clarification of the provisions. I shall therefore add only a few general remarks about the provisions that the Government are seeking to amend today. There is of course a degree of consensus on the film industry. Members on both sides of the House recognise the importance of making the UK a competitive and attractive place in which to make films, because of the commercial and cultural importance of the film industry, and because it is a highly mobile industry and we are competing with other jurisdictions providing incentives for film makers.
We all agree that the old section 42 and section 48 reliefs have been abused and that they have to go because they are not providing sufficient value for money for the taxpayer. If we are going to have film tax reliefs, it make sense to focus them on the people who actually make films, as the Bill attempts to do, rather than on those who merely wish to reduce their tax bill—the people whom the Chancellor memorably described as the grey middlemen.
There are, however, a number of technical problems with the new structure, such as the blurred edges of the definition of a film production company, and the requirement that such a company be involved in pre-production as well as in principal photography and post-production. We are also concerned about the impact of the rules on TV companies, which cannot claim the reliefs but are still subject to the burdens of the framework, including problematic new accounting provisions.
Above all, we very much hope that the pattern of continuing changes in the film tax regime that we have seen in recent years will not be repeated in the next Finance Bill. There have been recurring amendments to the regime, and the resulting instability creates serious difficulties for the industry, driving up costs and deterring film makers from coming to the UK. We urge the Government to do everything possible to provide a stable tax framework for the British film industry, and one that will provide much greater value for money for the taxpayer—
Mr. Deputy Speaker: Order. May I remind the hon. Lady that these are minor technical and drafting amendments? Her remarks are going rather wide of those matters.
Mrs. Villiers: Mr. Deputy Speaker, you have been very indulgent, and I am grateful to you and to the House for listening to my general remarks, which I was about to conclude.
Julia Goldsworthy: We consider these proposals to be minor technical amendments and we do not need to make any detailed comments on them at this stage.
The Financial Secretary to the Treasury (John Healey): I welcome the fact that the hon. Member for Chipping Barnet (Mrs. Villiers) regards these amendments as useful. The provisions on leasing are narrow, and I do not propose to re-run the wider arguments that we went into in some detail in Committee. However, we will keep the new regime for leasing under close review. We will also consult the interests in the industry when monitoring the impact and operation of the new regime, just as we did during its design.
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