Finance Bill


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Mr. Philip Hammond: I beg to move amendment No. 143, in schedule 7, page 105, line 42, at end insert—


 
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    ‘Capital redemption policies—capital loss treatment

      13A   (1)   Section 210 of the Taxation of Chargeable Gains Act 1992 is amended as follows—

      (2)   After subsection (12) insert—

      “(12A)   Where a person makes a disposal of a capital redemption policy, within the meaning of Chapter 2 of Part 13 of the Taxes Act 1988, then no allowable loss shall accrue to that person.”.’.

    The Chairman: With this it will be convenient to discuss the following amendments: No. 141, in schedule 7, page 105, line 43, leave out from beginning to end of line 36 on page 106.

No. 142, in schedule 7, page 111, line 18, leave out from beginning to end of line 30.

Mr. Hammond: Amendment Nos. 141 and 142 delete paragraph 14 and paragraph 20 respectively in their entirety and insert in their place the words of amendment No. 143. The stated purpose of the changes in paragraphs 14 and 20 is to stop the use of capital redemption bonds to manufacture artificial capital losses. The proposal changes the tax treatment of all capital redemption bonds held by companies, whether they are involved in such arrangements or not. Our proposal addresses the specific problem that the Government have identified, without including capital redemption bonds in the loan relationships regime.

Paragraphs 14 and 20 change the treatment of CRBs held by companies, but not by individuals, by including them in the loan relationship regime, which taxes as income annual movements of certain money debts. By including capital redemption bonds as loan relationships, they will no longer be taxable under the normal chargeable events rules like other products sold by life insurers. That is the concern of the insurers. That approach will hit the counter-party rather than the person generating the capital loss.

The Association of British Insurers supports the Government in stopping avoidance, but feels that there are more appropriate ways of achieving that, such as our proposal to exclude CRBs from the capital gains regime by amending section 210 of the Taxation of Chargeable Gains Act 1992. I am sure the Paymaster General is aware that the insurance industry is opposed in principle to the change in the tax treatment of CRBs held by companies, which will mean that they are treated differently from similar life products sold by insurers. The proposals are unfair to corporate investors who have chosen to invest through the medium of a capital redemption contract, not necessarily for tax avoidance purposes. In particular, they will mean that companies not involved in avoidance will lose their ability to take small surrenders of such policies without an immediate tax liability.

If the Paymaster General rejects the amendments, it is important that arrangements are made for transitional relief for companies holding capital redemption bonds on 10 February that are in deficit due to withdrawals. If that is not done, the corporate investor will receive no benefit for those deficiencies. Had the assignment not been deemed to take place at
 
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the time when the CRB falls within the loan relationship regime, with the passage of time it would have been hoped that performance would wipe out any such deficiency on a later termination.

The industry’s best estimate is that the proposal will have an impact on at least 600 cases where no avoidance took place, amounting to deficits of about £43 million on 10 February. If the Paymaster General intends to reject the amendments, will she tell us what proposals the Government have for a transitional relief scheme that relates to the 600 or so companies that hold capital redemption bonds that are in deficit, and are not holding them primarily for tax avoidance purposes? What will she do to ensure that they do not suffer an unjustified and unexpected tax charge?

Dawn Primarolo: The amendments would remove paragraphs in the schedule that deal with capital redemption bonds, as the hon. Gentleman said, and replace them with a new rule in the Taxation of Chargeable Gains Act 1992. The ABI has indeed written to Committee members about the paragraphs on capital redemption bonds. The argument that the Government attempted to use CRBs as artificial capital losses is wrong. Amendment No. 143 would go beyond what the Government are proposing and deny anyone capital losses, regardless of whether the CRB in question is held by a company or an individual. That is not necessary or desirable.

7 pm

The hon. Gentleman concentrated his remarks on the next two amendments, Nos. 141 and 142. The ABI’s central objection to the paragraph is that it requires CRBs held by companies to be taxed as loan relationships. That means that companies do not receive the benefit of the special relaxations applying to life assurance policies. CRBs are more like bonds that are issued by banks and building societies, the only difference being that they are issued by insurance companies. However, they are not life assurance policies. No element of contingency on human life is contained in them and there is no reason why they should not be taxed like their direct comparables. The aim is apparently to gain access to life assurance policy regimes when CRBs are clearly not part of such a regime.

I cannot help the hon. Gentleman with details of the 600 companies because although the ABI has been asked to give details, it has not done so. If the question was more specific, we would respond to it, but it is not possible to do so until there is a wider disclosure of information. It is impossible for officials to draft relief to a problem that is not being explained because they do not know the ABI’s target or its solution. If the ABI proves willing to bring forward a proposal or certain details to be considered, we shall request officials to respond accordingly, but in the absence of anything except, “Here is a problem. We want relief.”, without detailing such matters and enabling that relief to be targeted properly, I do not see what else the officials could have done. Assuming that the ABI will come forward with certain details, I hope that hon. Gentleman will withdraw his amendment.


 
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Mr. Hammond: I hear what the right hon. Lady says, as will the ABI. I shall find out its thoughts. Perhaps it has a specific proposal to be tabled on Report. I wonder whether the real problem is that the right hon. Lady is asking for information, which it would be improper for the ABI to disclose. If she asking for information about individual counter parties to policies that it has issued, I imagine that it would have the same kind of confidentiality regime as the Inland Revenue and which the right hon. Lady has spoken about. [Interruption.]

It is no good dismissing such matters. Clearly, there are areas especially in financial services when it is difficult for people to discuss their worries with the Inland Revenue, while not breaching the confidentiality that they owe to their clients. I shall take the right hon. Lady’s comments on board and see what the ABI has to say about them. I am sure that she will hear that in due course either during our discussions on Report or probably on Thursday morning in a letter that has landed on her desk from the ABI. In the meantime, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Hammond: I beg to move amendment No. 136, in schedule 7, page 109, line 9, leave out from beginning to end of line 23.

The Chairman: With this it will be convenient to discuss the following amendments: No. 137, in schedule 7, page 109, line 10, at end insert—

    ‘(2A)   Where two or more associated companies cease to be members of a group at the same time, sub-paragraph (2) does not have effect in relation to a transfer between those companies.

    (2B)   But where—

      (a)   a company (“the transferee”) that has ceased to be a member of a group of companies (“the first group”) has been assigned an asset or liability from another company (“the transferor”) which was a member of that group at the time of the transfer, and

      (b)   sub-paragraph (3) applies in relation to the transferee’s ceasing to be a member of the first group so that sub-paragraph (2) does not have effect, and

      (c)   the transferee subsequently ceases to be a member of another group of companies (“the second group”), and

      (d)   there is a relevant connection between the two groups (see sub-paragraph (5)),

    sub-paragraph (2) has effect in relation to the transferee’s ceasing to be a member of the second group as if it were the second group of which both companies had been members at the time of the transfer.

    (2C)   For the purposes of sub-paragraph (4) there is a relevant connection between the first group and the second group if, at the time when the transferee ceases to be a member of the second group, the company which is the principal company of that group is under the control of—

      (a)   the company that is the principal company of the first group or, if that group no longer exists, was the principal company of that group when the transferee ceased to be a member of it; or

      (b)   any person or persons who control the company mentioned in paragraph (a) or who have had it under their control at any time in the period since the transferee ceased to be an member of the first group; or

      (c)   any person or persons who have, at any time in that period, had under their control either—

      (i)   a company that would have been a person falling within paragraph (b) if it had continued to exist, or


 
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      (ii)   a company that would have been a person falling within this paragraph (whether by reference to a company that would have been a person falling within paragraph (b) or by reference to a company or series of companies falling within this provision).

    (2D)   The provisions of section 416(2) to (6) of the Taxes Act 1988 (meaning of control) have effect for the purposes of sub-paragraph (5) as they have effect for the purposes of Part 11 of that Act.But a person carrying on a business of banking shall not be regarded for those purposes as having control of a company by reason only of having, or of the consequences of having exercised, any rights in respect of loan capital or debt issued or incurred by the company for money lent by that person to the company in the ordinary course of that business.’.

No. 138, in schedule 7, page 117, line 37, leave out from beginning to end of line 8 on page 118.

No. 139, in schedule 7, page 117, line 38, at end insert—

    ‘(2A)   Where two or more associated companies cease to be members of a group at the same time, sub-paragraph (2) does not have effect in relation to a transfer between those companies.

    (2B)   But where—

      (a)   a company (“the transferee”) that has ceased to be a member of a group of companies (“the first group”) has been assigned an asset or liability from another company (“the transferor”) which was a member of that group at the time of the transfer,

      (b)   sub-paragraph (3) applies in relation to the transferee’s ceasing to be a member of the first group so that sub-paragraph (2) does not have effect,

      (c)   the transferee subsequently ceases to be a member of another group of companies (“the second group”), and

      (d)   there is a relevant connection between the two groups (see sub-paragraph (5)),

    sub-paragraph (2) has effect in relation to the transferee’s ceasing to be a member of the second group as if it were the second group of which both companies had been members at the time of the transfer.

    (2C)   For the purposes of sub-paragraph (4) there is a relevant connection between the first group and the second group if, at the time when the transferee ceases to be a member of the second group, the company which is the principal company of that group is under the control of—

      (a)   the company that is the principal company of the first group or, if that group no longer exists, was the principal company of that group, when the transferee ceased to be a member of it; or

      (b)   any person or persons who control the company mentioned in paragraph (a) or who have had it under their control at any time in the period since the transferee cease to be a member of the first group; or

      (c)   any person or persons who have, at any time in that period, had under their control either—

      (i)   a company that would have been a person falling within paragraph (b) if it had continued to exist, or

      (ii)   a company that would have been a person falling within this paragraph (whether by reference to a company that would have been a person falling within paragraph (b) or by reference to a company or a series of companies falling within this provision).

    (2D)   The provisions of section 416(2) to (6) of the Taxes Act 1988 (meaning of control) have effect for the purposes of sub-paragraph (5) as they have effect for the purposes of Part 11 of that Act.But a person carrying on a business of banking shall not be regarded for those purposes as having control of a company by reason only of having, or of the consequences of having exercised, any rights in respect of loan capital or debt issued or incurred by the company for money lent by that person to the company in the ordinary course of that business.’.

No. 140, in schedule 7, page 119, line 12, at end insert—


 
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    ‘Degrouping: principal company becoming member of another group

      24A   (1)   Paragraphs 18 and 24 do not apply where a company ceases to be a member of a group by reason only of the fact that the principal company of the group becomes a member of another group (“the second group”).

      (2)   But if, in a case where paragraphs 18 and 24 would have applied but for sub-paragraph (1) above, after the assignment and before the end of the period of six years after the date of the assignment—

        (a)   the transferee ceases to satisfy the condition that it is both a 75% subsidiary and an effective 51% subsidiary of one or more members of the second group (“the qualifying condition”), and

      (b)   at the time at which the transferee ceases to satisfy that condition, the relevant loan relationship or derivative contract is held by the transferee or another company in the same group,

    this Schedule has effect as if the transferee, immediately after the assignment to it of the relevant loan relationship or derivative contract, had realised the loan relationship or derivative contract for its market value at that time and immediately reacquired the asset at that value.

    (3)   The adjustments required to be made in consequence of sub-paragraph (2), by the transferee or a company to which the relevant loan relationship or derivative contract has been subsequently assigned, in relation to the period between—

      (a)   the assignment of the relevant loan relationship or derivative contract to the transferee, and

      (b)   the transferee ceasing to satisfy the qualifying condition,

    shall be made by bringing the aggregate net credit or debit into account as if it had arisen immediately before the transferee ceased to satisfy the qualifying condition.

    (4)   For the purposes of section 82 of this Finance Act 1996 (Method of bringing amounts into account) and paragraph 14 of Schedule 26 to the Finance Act 2002 (Method of bringing amounts into account), credits or debits brought into account by virtue of this paragraph take their character from the purposes for which the relevant loan relationship or derivative contract was held by the transferee immediately after the assignment.’.

Mr. Hammond: These are very long amendments, which would insert alternative wording into paragraphs 18 and 24, which deal with degrouping in the case of loan relationships and derivative contracts. I do not intend to go through the detail of the amendments, other than to say that they follow the legislation in schedule 29 of the Finance Act 2002 on the degrouping rules following the transfer of intangible assets between companies within a group, with some importation of language from section 179 of the Taxation of Chargeable Gains Act 1992.

Turning from the architecture of these long amendments to the purpose behind them, our aim is to ensure that the degrouping rules work fairly. The amendments match the degrouping rules for intangible assets. While the degrouping rules for loan relationships and financial derivatives have been introduced to stop tax avoidance and therefore have no motive test, they are wide in scope. Through the amendments we seek to ensure that the degrouping rules do not apply when the transferor and transferee leave the group at the same time, in which case the tax planning, which is subject to attack, would not be in question.


 
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We seek also to deal with problems of definition of capital gains tax group, which gives rise to amendment No. 140. We also seek to ensure that the degrouping rules work to create both gains and losses, so that in commercial situations in which the degrouping rules are triggered, the tax impact is fair and not a penalty on genuine commercial transactions.

As before, I say to the Paymaster General that unless a measure is so narrowly targeted that we can be absolutely certain that only blatant tax avoidance will be hit—that will usually be where there is a test—it is important that there is some symmetry in the imposition of tax, so that where a commercial transaction is caught, it is treated fairly, with deductions as well as charges on gains arising.

Degrouping charges already apply in both capital gains tax and intangibles rules. They were originally introduced many years ago to prevent the tax planning technique of transferring an asset into a group company, then selling the group company rather than transferring the asset itself, and in that way avoiding a capital gain arising.

A degrouping charge can create a loss as well as a gain, and for capital gains tax and intangibles purposes the purchaser picks up the gain but can agree with the vendor that the vendor picks up the charge. Typically, there is an exemption where the transferor and transferee leave the group at the same time—that is, as part of the same transaction on the sale of a sub-group. That exemption exists to allow genuine sales of sub-groups without there being a deemed tax charge on a gain that has not yet been realised. I hope that the Paymaster General will give serious consideration to these points arising in relation to degrouping in situations in which there has been a replacement of a party to a loan relationship or a derivative contract.

Dawn Primarolo: The amendments would change the anti-avoidance degrouping charge for loan relationships. Given the history of debates on earlier amendments, it will not surprise the Committee to hear me say that these ones would not work. The aim of the rule is to prevent companies from taking profits on assets that are loan relationships and which would be taxed as income, and converting them into capital gains in the form of profit on shares using corporate envelopes. The rule applies only if the loan relationship is standing at a profit, because if there is a potential loss, a company might try to engineer an artificial degrouping to crystallise the loss.

The first effect of the amendments would be to allow losses as well as profits to arise on a degrouping, which would defeat the purpose of the rule. As the hon. Gentleman has been told, there is one circumstance in which a loss is allowed—when there is a hedging relationship between a derivative contract and a loan relationship that produced a profit on one and an equal and opposite loss on the other. That is a reasonable approach and as far as we want to go on losses.

Amendment No. 137 would add a new rule that there is no charge if a loan relationship is transferred between two companies that leave a group at the same time. That has an equivalent in the capital gains
 
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degrouping rules, but after making the amendment it would be necessary to import another page of complex anti-avoidance legislation to prevent manipulation of the two-company exemption. It is ironic that at this point in the Committee’s discussions the Government are accused of enacting complex anti-avoidance measures, given that Opposition Members, by their amendments, seek to allow a wholly inappropriate relief from a rule, which would involve adding greatly to the complexity of the legislation.

The reason why the capital gains degrouping charge involves an exemption where two companies leave a group at the same time is that, in such circumstances, there is no avoidance of tax. The capital gain inherent in the transferred asset is matched by the capital gain arising on the shares sold, but allowing the same rule in this respect would entirely defeat the objective of the measure. That is because any profit on disposal of a loan relationship is charged to tax as income, not as a capital gain. Allowing an exemption where two companies left a group at the same time would simply allow an alternative way of converting income into capital.

Amendments Nos. 138 and 139 would do exactly the same for the derivative contracts degrouping charge as amendments Nos. 136 and 137 do for the equivalent loan relationships degrouping charge.

Amendment No. 140 would add further complexity to the degrouping charge for loan relationships and derivative contracts. It is similar in its approach to a rule in the capital gains degrouping legislation that prevents the capital gains degrouping rule from applying in a case in which a company leaves a group only because the group is acquired by another company or group. However, as I explained in relation to the previous amendments on the degrouping charge, the loan relationships and derivative contracts rules are very different from the capital gains rules. Many loan relationships and derivative contracts will not be affected by the degrouping charge, because they will be accounted for on a fair value basis. That is increasingly the case, particularly under international accounting standards and new United Kingdom generally accepted accounting practice. In many other cases, any profit arising on a deemed disposal on leaving a group will not give rise to a large gain. Normal loans, especially floating-rate ones, often vary very little in fair value. In capital gains cases, however, there can be a very large gain and it would arguably be unfair to tax the gain in the circumstances mentioned in the amendment. There is another problem with the amendment: it just would not work properly at a technical level. In any case, I am not convinced that the problem is serious enough to warrant more pages of complex legislation. It would have to be at least twice as long as the amendment.

7.15 pm

Instead, although I take the view that there are no issues relating to degrouping, I propose—just in case—to ask HMRC officials to keep the point under consideration and follow the matter carefully. Given the complexities of a number of different sets of rules
 
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coming together, that would be prudent. I give the hon. Gentleman that assurance, although I do not accept his amendments.

Mr. Philip Hammond: I hope that, at the end of the day, the right hon. Lady has enjoyed the opportunity comprehensively to trash a set of amendments—both the principle behind them and the drafting of them. However, I am grateful for what she has said, which I take as an indication that she recognises at least that there is an issue to which one needs to be alert, even if she thinks that there is no cause for the concern that we have expressed.

Given what the right hon. Lady has said about their drafting and effects, I shall not seek to press the amendments. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 7, as amended, agreed to.

Clause 41

Intangible fixed assets

Question proposed, That the clause stand part of the Bill.

Mr. Mark Francois (Rayleigh) (Con): rose—

The Chairman: I welcome the hon. Member for Rayleigh (Mr. Francois) for the first time in this Committee.

Mr. Francois: Thank you, Sir Nicholas. I spoke on clauses 11 and 69 in the House, but as this is my first formal contribution in Committee, I take this opportunity to reciprocate and welcome you, Sir Nicholas, to the Chair. I also thank you for your good-humoured chairmanship. You have demonstrated that light-touch regulation often works best.

Clause 41 deals with intangible fixed assets such as goodwill, customer lists, patents and certain quota payments. In 2002, the Government introduced a new regime for dealing with those, and that allowed companies to obtain corporation tax deductions for certain intangibles. The Government sought to amend the regime in 2003, to close what they believed were a number of loopholes; clause 41 is a development of that process.

The Conservatives do not object specifically to the provisions in clause 41, but we have a particular question about the treatment of single farm payments, which are due to begin in the UK around February 2006—within the current tax year. Subsection (4) is designed to prevent capital gains being rolled over into payment entitlements under the single farm payments scheme. However, there has been considerable confusion over the proposed tax treatment of those payments.

I raised that issue at Environment, Food and Rural Affairs questions on 9 June and was told by the Under-Secretary of State for Environment, Food and Rural Affairs, the hon. Member for South Dorset (Jim Knight), that a dedicated tax bulletin on the proposed
 
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tax treatment of the single farm payment was due to be issued before the end of June to give farmers and their advisers time to plan. I therefore take this opportunity to inquire of the Minister whether that bulletin has yet been issued.

The Economic Secretary to the Treasury (Mr. Ivan Lewis): It is good to get some exercise, Sir Nicholas; I am freed from the risk of deep vein thrombosis. Having sat in the Committee so long, I am certainly beginning to feel the effects of jet lag.

I congratulate the hon. Member for Rayleigh on his debut in this Committee and I thank him for the way in which he presented his question and for giving me a little advance notice. I shall give him a very concise answer. As I understand it, the guidance that he asked about has not yet been issued, although our intention is to issue it as soon as possible. However, there may be some confusion about what guidance we are speaking about, so I shall try to clarify that.

On 22 March, an order was issued that was specifically about adding the entitlement to single farm payments to the list of business assets eligible for capital gains roll-over relief. Was that the guidance that the hon. Gentleman was seeking? Basically, an explanatory memorandum was issued with that order back in April. If the hon. Gentleman’s question was on that specific point, then I think that I have taken care of it; but if it was a more general question about guidance and SFP, then I can tell him that the more general guidance has not yet been issued and it is our intention to issue it as quickly as possible. I hope that that answers his question.

 
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