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Session 2005 - 06
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Standing Committee Debates
Finance Bill

Finance Bill

Column Number: 265

Standing Committee B

Thursday 30 June 2005


The Committee consisted of the following Members:

Chairmen: Sir Nicholas Winterton, †Frank Cook

†Austin, Mr. Ian (Dudley, North) (Lab)

†Balls, Ed (Normanton) (Lab)

†Field, Mr. Mark (Cities of London and Westminster) (Con)

†Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)

†Francois, Mr. Mark (Rayleigh) (Con)

†Goodman, Helen (Bishop Auckland) (Lab)

†Hammond, Mr. Philip (Runnymede and Weybridge) (Con)

†Hammond, Stephen (Wimbledon) (Con)

†Healey, John (Financial Secretary to the Treasury)

†Huhne, Chris (Eastleigh) (LD)

†Kramer, Susan (Richmond Park) (LD)

†Lewis, Mr. Ivan (Economic Secretary to the Treasury)

Lucas, Ian (Wrexham) (Lab)

†McCarthy, Kerry (Bristol, East) (Lab)

†McFadden, Mr. Pat (Wolverhampton, South-East) (Lab)

†Marris, Rob (Wolverhampton, South-West) (Lab)

†Morden, Jessica (Newport, East) (Lab)

†Newmark, Mr. Brooks (Braintree) (Con)

†Primarolo, Dawn (Paymaster General)

Ruffley, Mr. David (Bury St. Edmunds) (Con)

†Spring, Mr. Richard (West Suffolk) (Con)

†Tami, Mark (Alyn and Deeside) (Lab)

†Watson, Mr. Tom (Lord Commissioner of Her Majesty's Treasury)

†Williams, Stephen (Bristol, West) (LD)

Frank Cranmer, Nerys Welfoot, Committee Clerks

†attended the Committee

[Frank Cook in the Chair]

Finance Bill

(Except clauses 11, 18, 40, 43, 44 and 69 and schedule 8)

Amendment moved [this day]: No. 110, in schedule 9, page 135, line 21, at end insert—

    'Taxation of structural investments of long-term funds of insurance companies

    8 (1) After section 83(2) of the Finance Act 1989 insert—

    ''(2AA) But subsection (2A) does not require to be taken into account as receipts of a period of account any increase or decrease in value of subsidiary undertakings, nor shall any distribution from a subsidiary undertaking, resident in the United Kingdom, be taken into account in subsection (2A).''.'.—[Mr. Mark Field.]

2 pm

The Chairman: I remind the Committee that with this we are also taking amendment No. 109, in schedule 9, page 135, line 22, leave out from beginning to end of line 25 on page 136.

Mr. Mark Field (Cities of London and Westminster) (Con): As I was saying, before I was so rudely interrupted—

The Chairman: Order. You were interrupted in accordance with the timetable that the Committee agreed; there was nothing rude about it.

Mr. Field: Mr. Cook, the rudeness to which I was referring was your health, of course. As I was about to say before the moment of interruption arrived, may I now ask the Economic Secretary to respond to my comments on amendments Nos. 109 and 110?

The Economic Secretary to the Treasury (Mr. Ivan Lewis): I would never be rude to you, Mr. Cook; as you said yourself, you are a man of legendary common sense and modesty.

The Chairman: Talk to amendment No. 110, please.

Mr. Lewis: Okay, Mr. Cook.

It is appropriate that amendments Nos. 109 and 110 are grouped, because the hon. Member for Cities of London and Westminster (Mr. Field) asked for that. I will address amendment No. 109 first.

As the hon. Gentleman explained, paragraph 8 adds a new section—section 444ACA—to the Income and Corporation Taxes Act 1988. It is designed to stop avoidance where business is transferred from one life assurance company to another. Paragraph 8 deals with situations in which company A—the company taking on the business—already owns some or all of the shares of company B, the company that transfers the business. In most cases, the transfer will cause the value of the shares in company B to fall. Under current tax rules, company A gets a tax deduction for that fall in value from either current or future profits. However, it is important to remember that that has happened only because company B transferred the business to company A, so the value of the business has now moved to company A. Therefore, company A has not really suffered a loss in value; the loss on the shares in
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company B is balanced by an increase in the value of its other assets. If we do not make the proposed change, companies such as company A will, in effect, get tax relief for the cost of acquiring business, and that is not an allowable tax deduction in any other circumstances. New section 444ACA stops that by adding an amount equivalent to the loss of the trading profits of company A for tax purposes. This is not a new idea. There are provisions in the capital gains tax code for denying deductions when that happens, and provisions that stop banks, share dealers—and, indeed, non-life assurance companies—getting relief for such losses. This change brings life assurance companies into line.

The hon. Gentleman suggested that there was scope for double charging. I can assure him that that is not the case. However, I accept that the new section might have the effect of bringing in an immediate increase in tax profits, even though the transfer of business might reduce profits over a period of years. That happens because companies often defer the recognition of gains and losses by valuing their assets at lower than market value for the purpose of calculating their surplus in their regulatory returns. That treatment is normally followed for tax purposes. Where a company adopts that approach, it is impossible to identify any individual gain or loss in a particular year's overall profits. In those circumstances, the only practical approach for the legislation to adopt is to bring in the additional amount at the time of the transfer of business. That may seem a little harsh in some cases, but there is no easy way of identifying which cases or how harsh. Having said that, I will ask Her Majesty's Revenue and Customs officials to discuss further with the industry the possibility of mitigating this effect in some cases. One way of doing that might be to spread the additional profits. I say to the hon. Gentleman that I cannot undertake to do anything under this Bill, but if a workable relieving measure can be found I shall look at the possibility of applying it back to December 2004 if that is reasonable. I am sure that all members of the Committee will agree that that is a benign, perhaps acceptable type of retrospection, which I hope that Opposition Members will not oppose.

The hon. Gentleman queried the use of fair value as the test for deciding the loss, if the company has written down the value of the assets to comply with the Financial Services Authority rules. I see no difference between that case and one in which the subsidiary, company B—if he can remember the example that I cited—was recently acquired for full market value. In both cases, an amount of cash equal to the value of the business of company B would have been received by company A and that represents the extraction of future profits which, but for paragraph 8, would go untapped.

The hon. Gentleman said that the business transfers under paragraph 7 are expensive and are not only carried out for tax avoidance. I agree that most paragraph 7 transfers are done for bona fide commercial reasons. They are used when industry consolidates, they are used for group restructuring and they are used in demutualisations. However, because there is a genuine commercial reason for the transfer, it
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does not mean that it cannot be structured in such a way that tax avoidance is a major consequence of the transfer. The fact that the Government have had to legislate repeatedly on such matters in 2003, 2004 and again this year demonstrates that that is a real issue.

Amendment No. 110 would remove from the investment return that is brought into account when computing a life assurance company's profits any part of the amount that relates to what the amendment calls ''subsidiary undertakings''. Now that the hon. Gentleman has explained the amendment, I begin to see why he considers that it would stop the avoidance that paragraph 8 is trying to stop. It would deny relief for losses on the shares of subsidiaries. However, the amendment suffers from a major difficulty. It does not explain how the loss in value of a subsidiary is to be carved out from an indistinguishable whole. That is exactly the problem that we had when drafting paragraph 8 and it is why, as I said, it can have the effect of bringing in profits too early.

The amendment does not just apply in cases when there is a transfer of businesses. It stops losses on subsidiaries in cases when there is no avoidance. That is not all that the amendment would do. It would go further than paragraph 8 in stopping losses. The Opposition have decided to do more and have tried to exempt from tax income and increases in value of subsidiary companies. It is difficult to justify the giving of a general exemption to shares in subsidiary undertakings and not to any other shares. If the shares of subsidiaries are held in the company's long-term insurance fund, there must be a presumption that they are held there because the income and gains from them provide benefits for policyholders. It is right that income, gains and losses are recognised and taxed at the appropriate rate.

It may be that, if a company could show that its subsidiaries were not somehow contributing to the life assurance business, there would be a case for carving them out. I hope that the hon. Gentleman accepts that the amendment makes no attempt to distinguish between subsidiaries that themselves carry on insurance business and those that simply hold a portfolio of investments as a convenient vehicle. I hope that he will agree that no subsidiaries of that latter sort should be given preferential treatment.

There are several other reasons why the amendment is flawed. I accept that that is a strong way in which to describe it, but the amendment would not work. It does not define subsidiary undertaking nor does it explain how the increase or decrease in value is to be carved out from an indistinguishable whole. It also seeks to discriminate in favour of UK-resident subsidiaries. I wonder whether the companies involved are the same companies that would be going to the European Court of Justice to protest about that sort of discrimination and to have it declared unlawful.

Having said that, I understand that issues about subsidiaries generally have been raised constantly in discussions with HMRC officials. I know that they would be happy to continue to discuss the issue in the context of the ongoing discussions on reform and simplification of the life assurance tax code more
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generally. I suggest to the industry that it pursues those discussions. On that basis, I ask the hon. Gentleman to consider withdrawing the amendment.

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Prepared 30 June 2005