Finance Bill


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Mr. Newmark: Will the Minister clarify one point? Why do the Government allow transactions under these provisions to benefit from the formal and legally binding advance clearance system established in clause 51, in respect of whether there was a main purpose of tax avoidance in using the provisions, while refusing to extend such a mechanism, despite taxpayers' desire for this, for the new tax arbitrage regime? Can the Minister reconcile that with the Paymaster General's comment last week, when she was asked to introduce a pre-clearance mechanism in respect of arbitrage rules? She said:

    ''By adopting an informal process, which works well for other anti-avoidance measures, companies are provided with the flexible system that they want, under which they will not feel obliged or pressured to seek formal clearance in every case, with all the costly bureaucracy and fees that go with ensuring that their approach is agreed. Instead, they need only ask for assistance when they are uncertain of the operation or application of the rules . . . If there is a statutory regime for clearance where even schemes that do not need it, because they are perfectly straightforward and no dispute is involved, go into that system and resources are consumed, the choice is a longer delay or not to do something else in the tax system.''—[Official Report, 23 June 2005; Vol. 435, c. 149–150]

The Financial Secretary to the Treasury (John Healey"8,1>): This group of amendments relates to clauses that introduce provisions relating to the new European company created by regulation EC/2157/2001, known as the European company statute.

I shall discuss the amendments rather in the way that the hon. Member for West Suffolk (Mr. Spring) did, because such a discussion opens a wider debate. The amendments cover clauses 51 to 55. It may help the Committee if I take a few moments to explain the background. That will, however, mean that I will have little or nothing to say by way of explanation on some of the other clauses.

The ECS, the European company statute, came into effect on 8 October 2004. It creates a legal framework for a new form of company: the European company—the ''Societas Europaea''—or SE. I am told that that is a Latin name, although my ability to decline Latin stopped after I said ''Bellum, bellum, bellum''—just to pick up the earlier military analogy.

The ECS regulation sets out the company law framework for SEs and the accompanying directive specifies that the employee involvement arrangements that apply to an SE mean that neither the regulation nor the employee involvement directive mention tax. The ECS permits the formation of an SE by various mechanisms, including a merger between two or more companies in different member states into an SE. The Department of Trade and Industry has issued the regulations enabling the formation of SEs, including formation by merger, in UK company law. For most UK tax purposes an SE based in the UK will be treated like a UK plc and will fit into the existing corporation tax regime and the other regimes relating to UK companies. That, in short, is the answer to the question by the hon. Member for Braintree (Mr. Newmark).

The issue for direct tax relates to the formation of SEs by cross-border merger in a prescribed form. Such a transaction was not previously possible in UK company law. Tax rules also have to take account of
 
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tax-specific EU legislation—the mergers directive—which I think the hon. Member for West Suffolk mentioned. The broad effect of the mergers directive is that the formation of an SE by merger should be tax neutral. The purpose of clauses 51 to 65 is to amend the UK chargeable gains, intangible assets, loan relationships and derivative contracts regimes broadly to ensure tax neutrality in the event of a merger to form an SE.

The amendments would affect clauses 51 to 55, which stipulate that the provisions apply only where three conditions are met. First, an SE is formed by the merger of two or more companies in accordance with the articles of the European company statute. Secondly, each company is resident in a member state. Thirdly, the merging companies are not all resident in the same member state.

Amendment No. 148 and a number of the others in the group seek to remove that third requirement. The removal of the requirement that not all companies involved in the merger should be resident in the same member state, would not be, as the hon. Gentleman suggested, simply a tidying-up exercise, but contrary to the purpose of the legislation and to EU law.

First, the ECS can apply only to mergers involving companies from more than one member state. Secondly, the mergers directive requires that the tax neutrality provided for in the directive can apply only to transactions involving companies from more than one member state. Furthermore, the directive requires, in effect, that those companies should be tax resident in different states. It is important to make those legal requirements clear to companies.

Finally, the hon. Gentleman raised a question about compatibility with treaties. The Government are confident that the provisions do not contravene the EU treaty. They are consistent with the ECS and the merger directive and ensure that a UK company's decision to merge with a company in another member state to form an SE is neither disadvantaged nor driven by tax considerations.

I hope that, on that basis, the hon. Gentleman will not press the amendments to a Division. If he does, I shall have to ask my hon. Friends to resist them.

Mr. Spring: I reassure the Minister that, as I indicated at the start, I do not propose to press the amendments any further. I am reassured by the fact that he believes that what is before us is compatible with EU law inasmuch as it may in future be tested. The simple point of the amendments was to create more flexibility but nevertheless, in our judgment and that of professionals outside, not be inconsistent with the EU legislation that created those SEs.

This matter is highly technical and we shall endeavour to listen carefully to those who have given us the advice that forms the basis of the amendments. If there is still disagreement on the issue, I hope that the Minister will permit me to correspond with him about it. I do not wish to detain the Committee further, and I beg to ask leave to withdraw the amendment.
 
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Amendment, by leave, withdrawn.

Clause 51 ordered to stand part of the Bill.

Clauses 52 and 53 ordered to stand part of the Bill.

Clause 54

Loan relationships

Mr. Spring: I beg to move amendment No. 155, in clause 54, page 47, line 28, at end add

    'and section 138 of TCGA 1992 (clearance in advance) shall apply to this sub-paragraph as it applies to section 137 of that Act (with any necessary modifications).'.

The Chairman: With this it will be convenient to discuss amendment No. 158, in clause 55, page 48, line 39, at end add

    'and section 138 of TCGA 1992 (clearance in advance) shall apply to this sub-paragraph as it applies to section 137 of that Act (with any necessary modifications).'.

Mr. Spring: Clause 54 seeks to extend to loan relationship issues the clearance regime that applies to the SE legislation in respect of capital gains tax issues. The clause does not apply if a main purpose of the SE's formation by merger was the avoidance of tax. The amendment seeks to use the existing mechanism on capital gains to obtain clearance that the merger does not have a main purpose of tax avoidance.

I turn to amendment No. 158. Clause 55 seeks to extend to derivatives the clearance regime that applies to the SE legislation in respect of capital gains tax issues. Again, the clause does not apply if a main purpose of the formation of the SE by merger was the avoidance of tax, so the amendment seeks to use the existing mechanism in relation to capital gains to obtain clearance that the merger does not have a main purpose of tax avoidance.

I would be grateful if the Minister clarified his view of the clause.

4.30 pm

John Healey: I am not entirely sure that I understood what the hon. Gentleman is asking me to clarify. However, I have two or three points to make that he might find helpful and, if he will bear with me, in doing so I might cover the matter that he was concerned about.

Clauses 54 and 55, as the hon. Gentleman suggested, will broadly ensure that the formation of an SE by merger should, as far as the UK loan relationship and derivative contracts regime is concerned, be tax neutral. In extending the provisions of the loan relationship and derivative contracts regime to give companies that certainty, there is a need, as I am sure the Committee recognises, to ensure that the provisions are not taken advantage of for the purposes of avoiding tax.

New paragraph 12B(5) in this clause and new paragraph 30B(5) in clause 55 contain an anti-avoidance rule. New paragraph 12B(6) in this clause and new paragraph 30B(6) in clause 55 both state that the provisions of sub-paragraphs (5) will not have an effect

    ''if before the merger Her Majesty's Revenue and Customs have on the application of the merging companies notified them that Her Majesty's Revenue and Customs are satisfied''


 
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that the transaction

    ''is effected bona fide commercial reasons, and does not form part''

of an arrangement to avoid tax.

I hope that the hon. Member for Braintree appreciates that both new sub-paragraphs (6) aim to make it clear that HMRC is fully prepared to give pre-transaction clearance to any company or companies that are considering merging to form an SE. However, there is no existing statutory clearance procedure within the loan relationship and derivative contracts regime under which that can be given. The procedures will therefore have to be made clear in guidance. I hope that the hon. Member for West Suffolk is satisfied with that explanation.

 
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