Schedule
6
Companies
carrying on business of leasing plant or
machinery
Mrs.
Villiers:
I beg to move amendment No. 67, in
schedule 6, page 115, line 5, leave
out ‘paragraph 41(8) of that Schedule’ and
insert
‘section 577 of the Capital
Allowances Act
2001’.
The
Chairman:
With this it will be convenient to discuss
amendment No. 66, in schedule 6, page 115, line 11, after
‘2006’,
insert—
‘but
where either the predecessor or the successor has no principal company
as therein provided (because it is itself a principal company) it shall
be deemed for the purposes of this section to be its own principal
company’.
Mrs.
Villiers:
The provisions in clause 30 and schedule 6 are
largely uncontroversial, as are a number of the matters that we will
look at this afternoon. The two exceptions to that are highlighted in
amendments Nos. 67 and 66. They would make changes to the definitions
in proposed new section 343A of the Income and Corporation Taxes Act
1988, which concerns company reconstructions involving a business
leasing plant or
machinery.
Amendment
No. 66 relates to the definition of the concept of the
“principal company” contained in proposed new section
343A. The measure is designed to prevent companies from undermining the
provisions in schedule 10 to the Finance Act 2006. Hon. Members may
recall the debate on that—it dealt with avoidance involving the
sale of leasing businesses. The schedule aims to counter a scheme that
sought to use the tax-neutral transfer provisions in section 343(2) of
the 1988 Act. Those provisions were intended to cover transfers within
a group and to counter the schemes that sought to use them for
transfers out of a group.
The proposed
new section will prevent thesection 343(2) tax-neutral
transfer from applying in certain situations in which a company
reconstruction involves the leasing of plant or machinery, which is to
say the transfer of leased assets between companies. Schedule 6 will
essentially disapply the carry-over of capital allowances under 343(2)
from one company to another unless certain conditions are
met—the companies are called the “predecessor” and
the “successor” respectively in the Bill. One of the
conditions is set out in proposed new section 343A(2)(a), which
provides that the principal company and the predecessor immediately
before the transfer must be the same as the principal company of the
successor immediately after the transfer.
1.45
pm
That is not
controversial, and does not cause problems that I am aware of in which
one subsidiary transfers its leasing business to another subsidiary of
the same parent. However, the section does not seem to work effectively
where a subsidiary transfers its leasing business to its parent, as
defined in paragraphs 11 and 12 in schedule 10 to the 2006 Act. That is
because the provisions of the schedule that we are considering do not
provide for any company to be its own principal company.
The best way to look at the
issue is by an example. Adopting the terminology used in schedule 10 to
the 2006 Act, where company B is the principal of company A, because A
is B’s qualifying 75 per cent. subsidiary, if A hives up its
leasing business to B, the condition contained in paragraph (a) of the
new section 343A(2) is not met, because company B has no principal
because it is itself the principal. The same problem would occur if a
parent company hived down its leasing business to its own subsidiary.
Horizontal transfers within the group are fine, and can use the
tax-neutral provision in proposed section 343A(2), but vertical ones
are not, and cannot use that tax-free transfer provision.
It seems to me that the
legislation goes beyond the intent of preventing the transfer of a
leasing portfolio out of the group, while still managing to use the
tax-free transfer provisions in section 343A(2). That is the mischief
that it is designed to address, but it goes beyond that. As well as
targeting transfers out of the group, it also seems to prevent upstream
or downstream transfers within a group from being tax-neutral. Thus,
under the guise of preventing avoidance, the current drafting prevents
a tax-neutral reorganisation within a group, even where there is no
change in the ultimate beneficial ownership, when no tax advantage is
being sought, and no economic profits being made.
There seems to be no rational
reason that I can see to disapply the carry-over contained in
proposed section 343A(2) in the vertical transfer situations, if the
Government are prepared to apply it in the horizontal transfer
situations. There may possibly have been a drafting error, which
amendment No. 66 would correct, by amending the definition of
“principal company” to provide that where the predecessor
or successor has no principal company at the time of the transaction,
it is deemed to be its own principal company. That minor change would
ensure that hiving up a leasing business to a parent, or down to a
subsidiary will be treated in the same way as transfers between
subsidiaries in a
group.
If
the Chief Secretary is not happy to accept the amendment, perhaps he
could explain why these two different types of transactions should be
treated differently. It is a particularly important issue at present,
because changes to the capital allowances regime in respect of leased
assets have removed the requirement for lessor groups to have a number
of subsidiaries with accounting periods spread throughout the year. As
a result, many leasing groups are currently in the process of
rationalising their corporate structures to hide their leasing trades
into two or three companies, having had a significant number
before.
Some of those
restructurings have already taken place, and some are under way at
present, or took place between the effective date of the legislation,
and the publication of the detailed rules. I am told that considerable
disruption could be caused by the arbitrary distinction that the
legislation seems to draw between vertical and horizontal transfers
within the group. I would be grateful if the Chief Secretary could
address that
point.
Amendment No.
67 seeks to amend the definition of market value contained in
subsection (5) of proposed new section 343A. It does not quite have the
urgency
and significance of the previous amendment, but it is important to give
the Committee the opportunity to test the reasons behind the choice of
definition contained in subsection (5) of the proposed new section
343A.
The relevance
of the definition is contained insubsection (4), which
provides that, where a carry-over in section 343A(2) is disapplied, the
leasing business shall be treated as having been sold by the
predecessor company to the successor for an amount equal to its market
value on the day of the transfer. The definition of “market
value” that is contained in subsection (5) of proposed new
section 343A refers to paragraph 41(8) of schedule 10 to the
Finance Act 2006, which is similar but not identical to the definition
in section 70YI of the Capital Allowances Act 2001. Both are predicated
on the idea of a notional disposal of the assets in the leasing
portfolio by the absolute owner, free of any leases or encumbrances. So
the focus is on the hypothetical market value of the underlying asset.
However, realistically, that value could be difficult to
determine.
Arguably,
when one is considering leased assets, it is artificial to focus on the
theoretical underlying value of the base assets, free of leasehold
interest. The property in question here is the leased interest, not the
absolute interest free of encumbrances. Arguably, the more appropriate
definition of “market value” is contained in section 577
of the 2001 Act, which focuses on the price that the book of leased
assets would fetch on the open market. Thus, amendment No. 67 would
remove the reference to section 41(8) of the 2006 Act and replace it
with a reference to section 577 of the 2001 Act, which would value the
portfolio being transferred at its actual worth, rather than at a
hypothetical base asset value. To deem assets to have different values
for tax purposes than their actual value always risks creating
anomalies and unfairness. I would be interested to hear the Chief
Secretary’s rationale for choosing the definition from section
41(8) of the 2006 Act rather than the one from section 577(1) of the
2001 Act.
I close by
emphasising that the leasing industry is a significant industry for the
UK economy, therefore it is vital that we get this issue right and, in
respect of these two amendments, if we do not, it could cause some
disruption to the restructuring that is already under
way.
The
Chief Secretary to the Treasury (Mr. Stephen
Timms):
I too welcome you back to the Chair,
Mr.
Gale.
Before setting
out the background to clause 30 and schedule 6, I should like to
acknowledge the point made by the hon. Lady about the importance of the
leasing industry and the importance, therefore, of getting these
matters right. As she told the Committee, schedule 6 introduces
anti-avoidance legislation in response to disclosures that we have
received about avoidance schemes being used that are designed to get
round measures in the Finance Act 2006 to combat the loss of tax from
the sale of companies leasing out plant or machinery.
In the early years of a
profitable lease, lessor companies generated losses but in the later
years the situation reversed: the lease became profitable, but tax was
being lost because groups were selling lessor
companies to loss-making groups at just the time that the leasing
transaction was about to become tax-profitable. The relevant provisions
in the 2006 Act prevent a loss of tax when a lessor company leaves a
profit-making group and becomes a member of a loss-making group by
bringing into charge an amount that prevents the loss of tax when a
lessor company is sold. The disclosures that we
received indicated that groups were avoiding the rules in two ways. One
type of scheme was using legislation that enables a group to transfer
leasing businesses without tax effect, rather than selling the lessor
company and the other manipulated the balance sheet value of leased
assets in a way that would reduce or eliminate the charge that
should be brought into account to prevent the loss of tax.
Schedule 6 stops both types of
scheme. First, it makes changes to the rules allowing groups
to transfer businesses without tax effect; those rules are in section
343 of the Income and Corporation Taxes Act 1988. Changes to
section 343 will mean that only transfers of assets between
subsidiaries of the same parent company—and certain transfers
involving consortium companies and partnerships—will benefit
from tax neutrality. Where the new rules apply so that a transfer falls
outside the existing section 343 provisions, the disposal of the assets
of the business is treated as taking place at a value equal to the
value of the asset unencumbered by the lease: that is, as if the lease
did not exist. That creates a charge broadly equivalent to the effect
of schedule 10 to the Finance Act
2006.
Secondly, the
schedule adds two new paragraphs to schedule 10 on the sale of lessors.
New paragraph 38A requires a company to ignore the consequences of
arrangements entered into to secure a tax advantage, and new paragraph
38B requires a company to ignore liabilities when determining the value
of its assets. Those changes will ensure that the sale of lessors
legislation works as
intended.
The hon.
Lady’s two amendments are directed at the first of those
anti-avoidance measures introduced by the schedule on the action that
limits tax-neutral transfers. Amendment No. 66, as she explained, seeks
to preserve tax neutrality for transfers between a subsidiary and its
ultimate parent company—a group’s principal company. I
shall explain why I shall ask the Committee to reject it, but I assure
her that it is not because of any drafting
error.
I
suggest that the amendment is unnecessary. In the vast majority of
cases, leasing businesses are conducted via wholly-owned subsidiaries,
and I am certainly not aware of any pressing commercial reasons for
transferring a leasing business to a principal company. In contrast,
the transfer of leasing businesses to a principal company increases the
risk of tax avoidance for two reasons. First, while we are aware that
some leasing is conducted through principal companies, we know that
transfers of businesses to holding companies have featured, not
uncommonly, in tax-motivated arrangements enabling groups to utilise
tax losses more
efficiently.
Secondly,
the transfer of a leasing business to a principal company could dilute
the leasing business so that the holding company would not be treated
as a lessor company. If that were to happen, the sale of
lessors legislation would not apply and the business could be
transferred from the principal company without triggering the
anti-avoidance rules. The amendment does not provide any protection
against abuses along those
lines. The issue that
the hon. Lady has raised was raised by us with the industry. We asked
it in January to provide evidence that the restriction that is being
introduced here on transfers to and from principal companies will
hinder normal commercial transactions. No such evidence has been
provided to us.
There
are real worries about tax avoidance, and I shall give an example. For
some foreign banking groups, the principal company is the main bank,
and the UK branches are, not infrequently, loss making. Some such
groups have purchased lessor companies, but rather than transferring
the business to existing leasing subsidiaries, they transfer it to the
branch so as to use its accumulated tax losses against the leasing
profits. I have not seen any evidence that those transfers are anything
other than tax motivated, and I do not think it would be right to
preserve what are, in such instances, clearly tax avoidance
opportunities. I have certainly not seen any evidence that transfers to
and from holding companies are necessary for the commercial operation
of a business, but in contrast, there is evidence that such transfers
have offered and could continue to offer potential for avoidance. On
those grounds, I hope that the Committee will reject the
amendment.
Amendment
No. 67 would, as the hon. Lady explained, change the value at which
plant or machinery is treated as transferred for tax purposes, and the
asset would be treated as transferred at the price it would fetch on
the open market, encumbered by the lease, rather than the value of the
asset unencumbered by the lease, which is the value provided for by the
schedule as it stands. Those values are often similar, but the crucial
problem is that it is possible that the value of the asset encumbered
by a lease could be manipulated in a way that would reduce or even
eliminate the impact of the anti-avoidance measure, whereas the market
value unencumbered by the lease cannot be manipulated in that way. That
is why we wanted that to be the value to which the legislation
refers.
The amendment
could, inadvertently, mean that the measure does not meet its aim. I
hope that, given that explanation, the hon. Lady will feel able to
withdraw it, but if not I will certainly ask the Committee to reject
it.
2
pm
Mrs.
Villiers:
I will ask leave to withdraw the amendment and I
am grateful to the Chief Secretary for his exposition of the reasoning
behind the schedule. I would consider coming back to the amendments on
Report, perhaps after consideration of the evidence that he said he has
not been supplied with. I may want to reflect on that, but in the light
of what he has said it would not be appropriate to press the amendment
to a vote. I beg to ask leave to withdraw the
amendment.
Amendment,
by leave, withdrawn.
Question proposed, That
this schedule be the Sixth schedule to the
Bill.
Rob
Marris:
Although there is broad consensus for schedule 6,
it seems that we now have three and a half more pages of tax
legislation prompted by the fact that some bright sparks have already
found a way around the measures that were passed in, I think, schedule
10 to the Finance Act 2006. I pay tribute to their inventiveness, and
it is part of the innovation that we salute in this country, in one
sense, although I would rather it were channelled into scientific
endeavour rather than finding tax loopholes. While the Opposition
understandably frequently raise concerns about the length of what they
now call the tax code—the number of pages in Tolley’s tax
guide and so on—this is a classic example of how, within less
than six months of passing fairly lengthy legislation, a loophole is
found and we then have to pass another three and a half pages of
loophole-closing legislation.
Mr.
Timms:
I very much agree with my hon. Friend that some
very fine brains have sadly been misapplied, but I commend the schedule
to the Committee.
Question put and agreed
to.
Schedule 6
agreed
to.
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