Clause
31
Restrictions
on companies buying losses or gains: tax avoidance
schemes
Mr.
Timms:
I beg to move amendment No. 79, in
clause 31, page 23, line 7, leave
out
‘and’.
The
Chairman:
With this it will be convenient to discuss the
following: Government amendment No.
80
Amendment No. 83,
in clause 31, page 23, line 34, leave out ‘that date’ and
insert ‘5th December
2005’.
Government
amendment No.
81
Mr.
Timms:
The main purpose of clause 31 is to close another
tax avoidance scheme that has been disclosed to Her Majesty’s
Revenue and Customs and that could be used to defeat the aim of a
targeted anti-avoidance rule introduced in the Finance Act 2006. That
rule stops tax avoidance schemes that seek to secure a tax advantage,
whereby a company is sold from one group to another primarily to
transfer the benefit of capital losses between the two groups, and so
reduce tax. We have also taken the opportunity to relax a provision of
the 2006 legislation that affects only a small number of groups of
companies that realised capital losses before the legislation came into
effect.
We now realise
that the softening of the targeted anti-avoidance rule provided by the
clause goes a little too far, and would result in the rule failing to
prevent all cases of loss buying involving those protected losses,
hence the need for the Government amendments.
Amendments Nos. 79 and 80 make
the necessary changes to the text of the clause. They remove
the protection that the losses enjoy from the effects of the loss
buying targeted anti-avoidance rule where the parent company in the
group is taken over as part of a loss-buying scheme. The clause still
allows relief for the losses within the original group of companies if
the takeover is for commercial purposes. It prevents relief
only where one of the main purposes of the takeover is to secure a tax
advantage from the losses for the new
group. Amendment No.
81 provides that the changes apply only to assets disposed of on or
after 9 May this year, the date when the amendments were laid. The
amendments have also been published on the Treasury website.
There are three reasons why I
will urge my hon. Friends to resist what is proposed in
amendment No. 83, but I look forward to hearing the case that
the hon. Member for Chipping Barnet makes for
it.
Mrs.
Villiers:
The Opposition broadly welcome clause 31 and its
underlying intention. The additional anti-avoidance provisions in
subsections (1) to (3) do not appear to cause any obvious problems and
none have been brought to my attention. The further tweaks to the
anti-avoidance regime provided in Government amendments Nos. 79 to 81
broadly appear to hit an appropriate target, so we will not be opposing
those.
The relief
granted by subsections (5) and (6) is welcome as far as it goes. I
tabled amendment No. 83 to highlight a concern relating to the extent
of the relief that those subsections provide.
Subsections (5) and (6) are
aimed at correcting a problem with the anti-avoidance rules introduced
by section 70 of the Finance Act 2006, which inserted sections 184A to
184F of the Taxation of Chargeable Gains Act 1992. An incidental effect
of those rules was that they caught groups that had crystallised losses
via de-grouping transactions taking place prior to the announcement of
the 2006 Act measures in December 2005. Such de-grouping transactions
are undoubtedly controversial, but they were considered acceptable at
that time. The legislation could thus have operated retroactively to
apply to transactions already undertaken prior to the announcement of
the new measures.
Transitional measures were
therefore included in the 2006 Act to prevent the rules from operating
in that way and having that retroactive effect. In particular, the
transitional arrangements were intended to cover the technique in use
before December 2005 that allowed a group to crystallise loss on an
asset that had fallen in value without actually selling the
asset.
However, those
transitional rules have since proved to be unduly restrictive. They
included the condition that company B, which left the group as part of
the relevant crystallising transaction, had to continue to be
controlled by the principal company of the group that it had left. That
denied relief under the transitional provisions in a number of cases,
including when the company leaving the group had been sold to another
group in an ordinary commercial transaction. It also denied relief
where the company in question had been
liquidated.
Another
situation that was excluded from transitional relief was where the
principal company of the original group was taken over or involved in a
merger. Clause 31 amends the transitional arrangements in the 2006 Act
so that they provide relief in a wider range of circumstances. They
appear to be effective in extending the transitional
provisions in the 2006 Act to capital losses crystallised prior to
December 2005, and the Opposition broadly welcome that move. However, it had been expected
that the extension of the transitional arrangements and the relief that
they provide would allow relief in all affected cases since December
2005. Instead, clause 31(9) provides that the relaxation of the rules
takes place with effect only from 21 March 2007. Therefore, any gains
realised between 5 December 2005 and 20 March 2007 will not
receive relief under clause
31.
Amendment No. 83
would remedy that problem by providing that the changes made in
subsections (5) and (6) of clause 31 applied in relation to disposals
made on or after 5 December 2005, rather than just to those made on or
after 21 March 2007.
I
shall refer to an example that would be an issue in these
circumstances. A group entered into a crystallising transaction prior
to 5 December 2005, with the result that company B within the group
carried a loss. The group then made a capital gain between 5 December
2005 and 20 March 2007. Clause 31 would not allow the group to
use the losses crystallised in company B to offset that gain, because
it occurred prior to the implementation of the relaxation of the
transitional arrangements. Amendment No. 83 would permit the
crystallised losses to be used in relation to gains after 5 December
2005, rather than only those made after 20 March
2007.
I acknowledge
that that is not a wide-ranging point—only a few companies would
be affected—but it would be useful if the Minister considered
whether the relief granted by the clause should be extended in the very
limited way proposed by amendment No.
83.
I would like to
make a further point on the clause and add a few final words on the
amendment of section 184B of the Finance Act 2006. The Opposition
believe that it would have been useful to have further clarification in
statute of the test set out in subsection (1)(c) of section 184B
regarding the main purpose, or one of the main purposes, of the
relevant arrangement. We had an extensive debate on the main purpose
test this morning, and I highlight the matter only to indicate yet
another context where the test is used and questions must be
answered.
I recall, in
particular, that the Economic Secretary indicated that the Opposition
had never previously raised concerns about the main purpose test, but I
recall my hon. Friend the Member for Wycombe having raised similar
concerns on the main purpose test last year, and I believe that it may
have been considered on other occasions. The test is of concern to the
Opposition. We see that in this context, just as we saw it in the
context of this morning’s
discussion.
Mr.
Timms:
I am grateful to the hon. Lady for welcoming the
Government amendments, but, as I indicated, I have a number of
difficulties with the amendment that she
proposes.
First, the
amendment is technically defective as it would insert a repetition of
the phrase
“unless the
gains accrue to the company on a disposal of a pre-change
asset”
in section 184A(2)
of the 1992 Act. Secondly, and perhaps more substantially, it would
remove a relief
that is of value for some companies. A change made by subsection (5)
removes references to section 184B of the 1992 Act from section 70 of
the Finance Act 2006. Section 184B is about gain buying and the
references in section 70 provide relief to some companies that allows
them to use capital losses against certain
gains. The references
are being removed because they are needed only on a transitional basis,
unlike the equivalent rule for losses—unused losses can be
carried forward to later years, but gains are taxed in the year that
they arrive. An undesirable effect of the amendment would be to remove
the ability to set off losses against gains for a few affected
companies and to remove that relief
retrospectively.
Thirdly,
and perhaps most significantly, the amendment could create an
opportunity for tax avoidance of the type that the Government
amendments are aimed at preventing. The Government amendments apply
from 9 May this year. If the Opposition amendment was not technically
defective, it would mean that the tax treatment of transactions in the
18 months from December 2005 onwards could be revisited. That would
give a small number of companies an opportunity to try to obtain relief
where they had bought losses from other groups. Given those three
difficulties, I hope that I have persuaded the hon. Lady not to press
the amendment to a
vote.
I would like to
comment on the point about the main purpose test, which the hon. Lady
raised at the end of her remarks. Revenue and Customs has published
extensive guidance that incorporates examples of arrangements that are
likely to be caught by the legislation. In addition, the guidance,
which was well received, has been extended and clarified as a result of
discussion with business and professional advisers. Therefore, I hope
that it is not going to cause
difficulty.
The
Government amendments extend protection to encompass a small number of
groups holding capital losses that the targeted anti-avoidance rule
might not otherwise affect, and ensure that we retain a high level of
protection against some rather aggressive tax avoidance, whereby one
group of companies seeks to reduce its tax liability by buying the
capital losses of another. I commend those amendments to the
Committee.
Amendment
agreed
to.
Amendments
made: No. 80, in clause 31, page 23, line 7, at end
insert—
‘(ca) after that
paragraph
insert—
“(ca) no
qualifying change of ownership occurs at any time in relation to the
principal company of that group for the purposes of section 184A of
TCGA 1992 directly or indirectly in consequence of, or otherwise in
connection with, any arrangements the main purpose, or one of the main
purposes, of which is to secure a tax advantage falling within
subsection (1)(d) of that section,
and”,’.
No.
81, in
clause 31, page 23, line 34, at
end insert
‘; but the
amendment made by subsection (5)(ca) has no effect in relation to
disposals made before 9th May 2007.’.—[Mr.
Timms.]
Clause
31, as amended, ordered to stand part of the
Bill.
Clause
32
Lloyd’s
corporate members: restriction of group
relief
Ed
Balls:
I beg to move amendment No. 75, in
clause 32, page 24, line 15, after
‘premium’ insert ‘or other
consideration’.
The
clause adds a new section to the special tax rules dealing with
corporate members of the Lloyd’s insurance market. It aims to
counter a loss-buying scheme reported to Revenue and Customs under the
avoidance scheme disclosure rules. The scheme involves companies buying
tax losses from loss-making corporate members of the Lloyd’s
insurance market, thus ceasing their underwriting activities. The
clause will close that window by requiring that the group relationship
between a corporate member and company that claims group relief to
exist from the last day of the year in which the insurance business was
written to the first day of the year in which the claim to group relief
is made. The rule is narrowly targeted and will apply only to losses of
a corporate member’s final year of writing insurance business.
The rule will restore the usual group relief principle that relief for
losses incurred in a year will be available only to companies related
to the corporate member in that same year, but it will not affect
ordinary commercial acquisitions in reorganisations when the newly
created group relationship is part of ongoing economic
activity.
2.15
pm
The amendment
arose from discussions with Lloyd’s. It will refine the
definition of “reinsurance to close premium” so that it
includes “other consideration”. “Reinsurance to
close” is the mechanism by which a Lloyd’s syndicate
closes its account. The commercial definition of “reinsurance to
close” has evolved over time and the amendment will ensure that
the tax rule will reflect the definition in Lloyd’s own
rule.
I hope,
Mr. Gale, that you do not mind that I have put the amendment
in the broader context of the clause. It has been part of a wider
consultative exercise on tax matters that we have had with
Lloyd’s and with representatives of the wholesale insurance
market over the past six months. Representatives of the Lloyd’s
market will not be surprised that we have proposed bringing
Lloyd’s syndicates into line with other companies. Industry
commentators agree that the provision is narrowly targeted and not
unreasonable. It was discussed with Lloyd’s experts in advance
of the publication of the detailed clauses.
As I have
said, the provision is part of a wider context under the auspices of
the high-level group on City competitiveness, which has discussed a
number of tax measures and wider market reforms aimed at enhancing the
competitiveness of the Lloyd’s market—an important part
of the City of London. I am therefore grateful for the work of the
Lloyd’s market and particularly to Lord Levene for his
leadership on that issue and for wider co-operation over the past eight
months or so. Within the context of that productive work to enhance
competitiveness, the change is necessary to bring the Lloyd’s
market into line with our wider approach to taxation in that area and
the amendment will close a loophole to ensure that the legislation is
properly effective. On that basis, I commend the amendment and the
clause to the Committee.
The
Chairman:
As there is only one amendment to the clause, I
propose to take the stand part debate with
it.
Mr.
Hoban:
I want to say two things. First, I welcome the work
that Lord Levene is leading on improving competitiveness of the
Lloyd’s insurance market. That market has been under pressure in
recent years—we have seen a number of wholesale reinsurers
relocate from the UK to Bermuda. It is therefore important to take
appropriate action to protect and strengthen that market. Secondly,
with regard to the amendment, I ask the Minister what “other
consideration” might include?
Rob
Marris:
I shall make my usual type of complaint during
stand part debates. Line 10 uses the word “premiums”. I
am shocked that no amendment has been proposed to change that to
“premium”.
Ed
Balls:
The definition in the original clause 32 was based
on one already in use in tax legislation specific to Lloyd’s,
which we had no reason to suspect was not operating as had been
intended. The change in Lloyd’s rules to that definition only
came to light during consultation with industry representatives on the
financial clauses and was made in response to comments from
Lloyd’s and other industry representatives.
The answer to the hon. Member
for Fareham’s question is that “other
consideration” applies to anything other than money. The
existing definition to which I have referred was in section 107 of the
Finance Act 2000 and will be repealed by schedule 11 to clause
41 of the Bill. Therefore, there is no need for a further change in
definition.
Mr.
Hoban:
I think that I am grateful to the Minister for his
clarification. I think that he is saying that one of the considerations
that can be part of the reinsurance to close process is non-monetary.
Having worked in the insurance market prior to coming to the House, I
am still at a loss as to what that consideration might be as part of a
normal insurance
transaction.
Ed
Balls:
I was rather hoping that my hon. Friend the Member
for Wolverhampton, South-West, in his normal diligent manner, might
have found some drafting irregularity in the explanatory notes that he
could have drawn to our
attention.
The hon.
Member for Fareham is quite right that when I said “anything
other than money”, I was referring to something that is
non-monetary. It is true that “non-monetary” is a
slightly more technical way of saying it, but they are probably the
same. I apologise for slipping away from the complexity of tax jargon
to a more colloquial way of saying the same thing.
[
Laughter.
] Who writes these things?
The answer is that the measure
follows the Lloyd’s byelaw and future-proofs the legislation in
case anybody comes along with some other consideration of a
non-monetary or anything-other-than-money nature, which might cause a
difficulty.
I am
struggling because we are discussing a currently unforeseeable case.
Given that, we want to ensure that were such an unforeseeable
circumstance to transpire,
we would have pre-empted it. Pre-empting a currently unforeseeable
circumstance is not easy to define other than in the most general of
terms—hence, the phrase “other consideration”. It
says here that that could be anything, such as the assignment of
rights. I am sure that the hon. Gentleman will understand that
perfectly, given his declared expertise in this area. I hope that I
have provided sufficient clarity to the Committee for it to move
forward.
Amendment
agreed
to.
Clause 32,
as amended, ordered to stand part of the
Bill.
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