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Mr. Spring: Yes, I am. I was seeking clarity on the clearance procedures and I am satisfied by the Minister's explanation of what will happen. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 54 ordered to stand part of the Bill.
Clause 55
Derivative contracts
Mr. Spring: I beg to move amendment No. 157, in clause 55, page 48, line 29, after 'a', insert
The amendment was drafted to ensure consistency with new paragraph 12B(5) of schedule 9 to the Finance Act 1996, which is inserted by clause 54. Will the Minister comment on the proposal? It is a tidying-up exercise to make the provision clearer and to bring consistency to the Bill.
John Healey: The hon. Gentleman is trying to ensure clarity in the Bill. However, the heading that immediately proceeds new section 30B, ''Formation of SE by merger'', already forewarns the reader that the new clause applies only in those circumstances. While I concede that both the intention and the effect of the amendment is designed to be constructive, it is not really necessary and I hope that the hon. Gentleman withdraws it.
Mr. Spring: I thank the Minister for his explanation. Our wording would have made the provision more clear, but I accept his underlying point. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 55 ordered to stand part of the Bill.
Clause 56
Capital allowances
Mr. Spring: I beg to move amendment No. 159, in clause 56, page 49, line 5, leave out ' a qualifying' and insert 'an'
The Chairman: With this it will be convenient to discuss the following: Government amendments Nos. 144 and 145.
Amendment No. 160, in clause 56, page 49, leave out lines 17 and 18.
Column Number: 310
Mr. Spring: The clause inserts new section 561A into the Capital Allowances Act 2001 to ensure that there is no clawback of capital allowances on the transfer of assets which occurs during the formation of an SE by merger—that is, where there is not a deemed disposal of market value of the fixed assets transferred to the SE during the merger so as to cause a balancing charge or allowance. As drafted, the provision applies only to capital allowance assets that fall within the scope of the Taxation of Chargeable Gains Act 1992, whereas some assets, such as chattels, are assets in respect of which capital allowances can be claimed but are not within the scope of that Act. Furthermore, it will not apply if the formation of an SE by merger falls within the usual relief under UK tax law for reorganisations of section 139 of the 1992 Act. We see no policy reason for that.
The Government amendments essentially cover the point that I am trying to make. I merely seek a further explanation from the Minister to clarify the point.
John Healey: I do not think that I need to explain the purpose of the clause. Both the Opposition and the Government amendments would extend the provision to a limited number of assets in areas that qualify for capital allowances but are outside the scope defined in the clause. To that extent I recognise clearly the constructive spirit in which the hon. Gentleman tabled the amendment. However, as I will explain briefly, both amendments have collateral consequences that are wider than I think he intended. For that reason I encourage him to consider accepting the Government amendments rather than press the formula in his amendments.
By removing the word ''qualifying'' under amendment No. 159, the scope of the clause would be widened to the extent where all assets eligible for capital allowances that are transferred as a result of a merger would be free of a capital allowances balancing charge. The relief would, in particular, be extended to assets to which the mergers directive may not apply, so it would be possible for companies to avoid a charge where one would be appropriate, for example, where the asset was no longer within the scope of UK tax after the merger. That could happen where the merged SE was in another member state and the assets transferred were no longer used for the purposes of a business in the UK.
Article 4(1) of the mergers directive provides that tax neutrality is only to apply to those assets that remain effectively connected to a permanent establishment in the transferring country. Consequently, the Government wish to restrict the scope of the clause only to those assets that remain effectively connected with a UK branch or permanent establishment.
On the other hand, although Government amendments Nos. 144 and 145 deal with the same problem of limited areas outside the scope of the original clauses, they do so in a way that does not require the removal of the terms ''qualifying assets'', thus avoiding the problem that I have outlined. I hope that the hon. Gentleman will accept them.
Column Number: 311
Mr. Spring: I did say that as currently drafted clause 56 only applies to capital allowance assets that are in the capital gains tax rules, which would have excluded most moveable plant and machinery and would therefore have been absurd. However, amendment No. 145 deals with that.
New subsection (3) rightly remedies the provision to cover all capital allowance assets and new subsections (4) and (5) seek to ensure that the subsection applies only where the assets remain in the charge to UK tax. That is a sensible condition, albeit one that may, regrettably—or may not—be challenged in due course under EU law. However, I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendments made: No. 144, in clause 56, page 49, line 7, after ''applies'', insert
'(or would apply but for section 140E(1)(d)).'.
No. 145, in clause 56, page 49, leave out lines 17 and 18 and insert—
'(3) For the purposes of subsection (1) an asset is a ''qualifying asset'' if—
(a) it is transferred to the SE as part of the merger forming it, and
(b) subsections (4) and (5) are satisfied in respect of it.
(4) This subsection is satisfied in respect of an asset if—
(a) the transferor is resident in the United Kingdom at the time of the transfer, or
(b) the asset is an asset of a permanent establishment in the United Kingdom of the transferor.
(5) This subsection is satisfied in respect of an asset if—
(a) the transferee SE is resident in the United Kingdom on formation, or
(b) the asset is an asset of a permanent establishment in the United Kingdom of the transferee SE on its formation.''.'.—[John Healey.]
Clause 56, as amended, ordered to stand part of the Bill.
Clauses 57 to 64 ordered to stand part of the Bill.
Clause 65
Restrictions on set-off of pre-entry losses
Mr. Spring: I beg to move amendment No. 161, in clause 65, page 54, line 11, leave out
'resident in the United Kingdom'.
The Chairman: With this it will be convenient to discuss the following amendments: No. 162, in clause 65, page 54, line 19, leave out from ''the'' to end of line 24 and insert
'most recent relevant event in relation to the company from which the asset was so transferred;''.'.
No. 163, in clause 65, page 54, line 28, leave out subsections (4) and (5).
Mr. Spring: These are probing amendments and I would be grateful if the Minister commented on them. They emerged from Law Society representations. I do not wish to detain the Committee long, but I want to set out some of the ideas that have been put to us. If some reassurance can be given, that will be valuable.
Column Number: 312
Amendment No. 161 relates to the pre-entry loss rules that prevent capital gains tax groups buying in capital losses from other capital gains tax groups. There is no need for the requirement for the SE to be resident in the UK as there is already a requirement that the relevant assets are within the charge to corporation tax on capital gains; for instance, if the SE is not UK resident, there must be a UK taxable branch that is a permanent establishment of that SE. That introduces more flexibility into the SE rules.
Amendment No. 162 relates to the pre-entry loss rules in the Taxation of Chargeable Gains Act 1992. The pre-entry loss rules work to prevent the purchase of capital losses from outside the capital gains tax group to shelter future capital gains. The relevant event determines when the asset became pre-entry. The amendment seeks to ensure that these rules are not triggered on formation of an SE by merger, which will allow greater flexibility and ensure that where there is a merger, which requires a particular structure by way of the definition of merger in the Council directives relating to SE and mergers of publicly limited companies, the formation of the SE does not cause any existing pre-entry losses to lose their restricted pre-entry nature on the SE merger.
The clause has the same effect, provided that the company transferring the asset to the SE does not cease to exist as part of the process of forming the SE by merger. However, the requirements to form an SE by merger under the relevant EU company law regulations mean that the clause should not open such a door, as no publicly limited company is going to spend the money, make the public announcements and tie themselves into an SE and the issues involving worker representation on the board, in order to get around a small part of the capital gains tax rules that the Government have suggested they intend to overhaul radically, if not abolish, when they legislate for their major reform of corporate taxation.
Amendment No. 163 simply continues to address that issue in terms of the definition of groups related to this category.
I would be grateful if the Minister could give some reassurance to those who have raised with us concerns about these matters.
4.45 pm
John Healey: The clause adapts the special anti-avoidance rules in schedule 7A of the Taxation of Chargeable Gains Act 1992. Without the changes, companies might be able to use the formation of an SE by merger as a means of tax avoidance. In addition, there would also be a disparity and an inconsistency of treatment compared with wholly domestic mergers.
The hon. Gentleman asked me to indicate why we feel the amendments are either deficient or not acceptable. Amendment No. 161 seeks to remove the restriction of the clause solely to those SEs that are resident in the UK. If accepted, that would mean that in theory the legislation was capable of applying to any SE wherever resident. That is beyond the competence of the UK Government. Consequently, while I understand that the amendment is well intentioned, it is technically deficient.
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Amendment No. 162 is, again, undoubtedly well intentioned, but its adoption would create ambiguity as to the meaning of the ''most recent relevant event''. That is because our existing legislation relating to relevant events does not cater for the situation where an SE is formed by merger and it is not the company which joins a new group. Instead, the effect of the merger might be that assets are transferred to the new UK-based SE. If the amendment were accepted, there would be a gap and businesses might be uncertain about whether the desired continuity would apply to mergers to form UK SEs.
Finally, amendment No. 163 seeks to remove subsections (4) and (5) from Clause 65. It would have the unfortunate effect of removing the anti-avoidance protection that is in the clause. It would also result in more favourable treatment for the formation of SEs by merger compared with wholly domestic mergers. I am sure that that is not the hon. Gentleman's intention. On that basis, I hope that he will not press the amendment to a Division.
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