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Session 2007 - 08 Publications on the internet General Committee Debates Finance Bill |
Finance Bill |
The Committee consisted of the following Members:Alan
Sandall, James Davies, Committee
Clerks
† attended the
Committee
Public Bill CommitteeTuesday 13 May 2008(Morning)[Sir Nicholas Winterton in the Chair]Finance Bill(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)10.30
am
The
Chairman:
I welcome all hon. Members to this further
sitting of the Finance Bill Committee. It is another very pleasant day,
and we had a wonderful weekend, so I hope that everyone feels duly
rested and recharged for the political conflicts ahead.
We are making
steady but not over-rapid progress on this important Bill, and we are
still on schedule 3. I understand from the Clerk that we had hoped to
complete consideration of the schedule on Thursday but, sadly, that did
not happen and we have three groups of amendments to discuss this
morning. I have selected amendment No. 26 to schedule 3 in the name of
Her Majesty’s Opposition. I am not sure which member of the
Opposition team will leap to his feet, but I shall take a gamble on it
being Mr. Philip
Hammond.
Schedule 3Entrepreneurs’
relief
Mr.
Philip Hammond (Runnymede and Weybridge) (Con): I beg to
move amendment No. 26, in
schedule 3, page 121, line 36, after
‘possession’, insert
‘, including a defeasible life
interest,’.
I
am pleased to hear that you had a good weekend, Sir Nicholas, although
I learnt from my television screen on Sunday afternoon that it seemed
to be more rainy in the north-west than the weather that we were
enjoying in southern England. It might not have been so in
Macclesfield, but it certainly was in
Wigan.
The
Committee will be pleased to know that the debate will be short, unless
the Minister has something startling to say. The amendment is a simple
probing amendment, and I make no claim to authorship. It would clarify
a small technical point to which an outside professional body has drawn
attention and make it clear that an interest in possession otherwise
than for a fixed term could include a defeasible life interest. I have
no great axe to grind one way or the other on whether a defeasible life
interest is included in the Bill, but I understand from outside
professional bodies that its drafting leaves them in some doubt whether
a defeasible life interest is included or excluded. We therefore
considered that it would be helpful to have definitive clarification
from the Minister. I do not in all honesty believe that the Bill
needs to be amended if the right hon. Lady can simply clarify the point
for the benefit of the professionals who are
interested.
The
Financial Secretary to the Treasury (Jane Kennedy):
Well,
here goes! Amendment No. 26 operates on the part of the schedule that
determines when entrepreneurs relief is available to trustees. It
seeks, in particular, to make it clear that a beneficiary with a
defeasible life interest in an interest in possession trust may qualify
for relief. I hope that I can demonstrate that the amendment is
unnecessary, although I appreciate the spirit in which it has been
moved. I am aware of the debate among interested parties about whether
a defeasible life interest would be considered an interest for a fixed
term and, hence, excluded from the entrepreneurs relief. I assure the
Committee that the fact that a defeasible interest may be terminated at
some point does not render it an interest for a fixed term. More
fundamentally, the amendment does not provide a definition of
defeasible life interest, so it would fail to provide the degree of
clarification that it may be intended to achieve.
I hope that
I have provided the help that the hon. Gentleman was seeking and that,
having heard my remarks, he will withdraw his
amendment.
Mr.
Hammond:
I am grateful to the right hon. Lady for taking
the amendment in the spirit in which it was moved. She has now placed
on the record the Government’s definitive view on what the
drafting means. I accept that the amendment is unnecessary and so beg
to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
The
Chairman:
For the information of the Committee, the
weather in Macclesfield on Sunday was brilliant. We had blue skies over
Macclesfield, as is appropriate. I took part in a seven-mile sponsored
walk and it did me the power of good. I ended up with a pint of beer,
which was very refreshing
indeed.
Mr.
Hammond:
I beg to move amendment No. 27, in
schedule 3, page 122, line 31, leave
out ‘as part of’ and insert ‘subsequently
to’.
No. 28, in
schedule 3, page 122, leave out lines 37 to
39 and insert
‘date of
the disposal referred to in subsection
(3)’.
Amendments Nos. 27 and 28
address a more substantive issue than the previous amendment. They
would amend the wording of new section 169K of the Taxation of
Chargeable Gains Act 1992, which deals with the associated disposal of
assets that have been used in connection with the business of a
partnership or a company, the interest in which is being disposed of by
the individual. In order for an associated disposal to be eligible for
entrepreneurs relief, two conditions have to be met. I particularly
want to draw the Committee’s attention to condition B, which
will be inserted by new section 169K(3), which states:
“Condition B is that the
individual makes the disposal as part of the withdrawal of the
individual from participation in the business carried on by the
partnership or by the company or (if the company is a member of a
trading group) a company which is a member of the trading
group.”
That has been
described as the lock, stock and barrel approach to the disposal of
associated assets. The assets must be disposed of as part of the
individual’s withdrawal from participation in the
business.
My first
point, which I hope the Minister will begin to clarify and to which we
might return later, is that the definition is rather vague. What does
“withdrawal from the business” mean? Presumably it does
not mean simply the sale of the shares or of the partnership share, or
ceasing to be employed in the business, because if it did it would say
so. It has to be a more complex concept, and there is concern that it
is not clearly defined. The point of withdrawal from the business will
be important in determining whether the proceeds of the sale of an
associated asset are eligible for taper relief, so I suspect that that
will be the source of some future legal clarification in the courts if
we do not get it right and make absolutely clear the precise meaning of
withdrawal of the individual from participation in the business. Does
it mean on the same day, in the same month or in the same year? Does it
mean that at the time the individual undertook the first action, he was
planning in his mind the second action as some kind of package concept?
Is it a motive test? Those are important questions.
My understanding of the Bill is
that an individual could not withdraw from the business, whether it is
a company or a partnership, and dispose of the asset at a later date,
because that would not be part of his withdrawal from the business. The
Minister might tell us that there are certain cases in which
withdrawing from the business and disposing of an asset at a later date
would constitute part of the withdrawal from the business, but we need
some clarity on what those circumstances will be.
I shall suggest a couple of
examples. Let us suppose that somebody owned farm land that was farmed
by a partnership of which he was a partner or by a company in which he
was a shareholder, and that he chose to dispose of his interest in that
partnership or company. He made that known to his partners or
co-shareholders and they were unable to raise the financial wherewithal
to buy his interest in the asset—the farm land—that is
used in association with the business—so he allowed them to
continue to use the asset, perhaps while they tried to raise the
finance to buy him
out.
One can envisage
many similar scenarios, for example a GP in a GP partnership who wished
to retire and cease to take an active role in the partnership, but
whose partners were unable at that time to buy out his interest in the
separately held asset—the premises in which the partnership
operated. Partners in a small accountancy firm might be in the same
position. One can think of many examples where the interest in the
property will be retained until either a new partner joins the
partnership or a new shareholder brings capital into the company, or
the existing partners and shareholders are able to raise the capital to
buy out the associated
asset.
It is important
that the Minister explains what is intended here—whether there
is an intentional barrier
to an asset used in association with a business being eligible for taper
relief and if so, to what extent that barrier is intentionally erected.
The Committee needs to know whether there are other cases, which the
Minister has not signalled, where there would be intentional barriers
to taper relief being available—in other words, a defect in the
way the provision will work. The group of amendments simply remove the
requirement for a disposal to be part of
withdrawal.
We have
debated whether any business asset should be eligible for entrepreneurs
relief and the Minister made it clear that as a matter of policy that
was not the Government’s intention. I do not seek to reopen that
debate. The group of amendments requires that the disposal be made
subsequent to the individual’s withdrawal from the business.
That would not cover a situation wherein somebody continuing the
business could sell the asset and benefit from taper relief, but it
would cover a situation wherein somebody who is withdrawing from the
business can retain the asset, allow it to continue to be used in the
business and then obtain taper relief on its subsequent sale.
It is tempting to think of the
asset always as land or buildings, but it might be plant and machinery,
or intellectual property. The individual who is exiting might own the
patent upon which a manufacturing business is built, or a brand name
which the company will continue to use in trading. It is not uncommon
that a business needs to establish continuity by continuing under a
trade name or a brand image, even if it will not be allowed to do so
indefinitely.
The
qualifying requirement in subsection (4) is also amended to require
that when the asset is disposed of, it has been in use during the
preceding year for the purposes of the business. It will need to be
owned by the individual claiming the entrepreneurs’ relief and
to have been in use in the business, but the individual himself will
not need to have been engaged in that business. That is the soft exit
provision, which will allow a partner who is retiring in circumstances
where his partners cannot buy out the asset to avoid cratering the
business by insisting on a third-party sale. There are real practical
reasons for such a provision and I hope that the Minister can clarify
what the Government’s intentions are and how in practice we can
avoid some of the pitfalls that I have
outlined.
10.45
am
Stewart
Hosie (Dundee, East) (SNP): My contribution will be brief,
and it follows on from the points made by the hon. Member for Runnymede
and Weybridge. Where a partner withdraws completely and can dispose of
every asset immediately and fully, one would imagine that they would be
able to benefit from the release. However, in the case that within the
same financial year—this is not uncommon in small
businesses—the business runs into difficulty and the individual
is called back on a paid or consultant basis, have they breached the
rules? Have they fully withdrawn, and will they still receive the
relief that they initially anticipated receiving on withdrawal,
although they have been called back in extremis? That is an important
point. People have contractual obligations not to re-engage with
another firm, but they may be called back to assist the partnership.
Would the relief still apply in those
circumstances?
Jane
Kennedy:
The hon. Member for Dundee, East makes a fair
point, which I shall address in a moment. I can confirm that on Sunday
afternoon, Liverpool, Wavertree, was deluged with what appeared to be a
mini tornado, which was so serious that it interrupted the broadcast of
a particular event that was taking place in Wigan, much to the
consternation of my best beloved and eldest son, who was not engaged in
gardening as I was, it being otherwise good weather.
Amendments
Nos. 27 and 28 would alter the rules governing the disposal of assets
associated with a business. In particular, they would remove the
requirement for associated disposals to be made alongside the
withdrawal of an individual from the business in question. As such,
they would dilute the targeting of entrepreneurs relief.
The amendments are unnecessary.
In constructing schedule 3, the Government have deliberately focused
entrepreneurs relief on individuals who are disposing of all or part of
their business.
The
hon. Member for Runnymede and Weybridge asked what “withdrawal
from the business” means. I invite him to look at page 122, line
32, which uses the
expression,
“withdrawal...
from participation in the
business”.
That does not
answer the point made by the hon. Member for Dundee, East, which I
shall come to in a moment, but the expression means just what it
states. There is no specific time limit—[Interruption]. I
will explain: there will be opportunities for a case to be made on a
case-by-case basis.
Asset
disposal occurs as part of the overall process of withdrawal, either
before or after the material disposal of shares or partnership
interests. We have not imposed intentional barriers to entrepreneurs
relief—that was never our objective. What we have deliberately
focused on, however, is the provision of relief to individuals who
withdraw from participation in a business. The eligibility criteria are
not meant to replicate criteria for the old taper relief. It depends on
the facts of the case, but it is possible for someone to withdraw from
a business and make an associated disposal at a later date. If the
disposal is linked to the withdrawal from participation, the individual
may receive relief. We need to take a fair view of the case based on
the
facts.
Mr.
Hammond:
What the right hon. Lady says sounds reasonable
in general terms: there will be an opportunity for a case to be made,
case by case, and the outcome will depend on the case. However, she is
saying that no one will ever be sure. Will there be a pre-clearance
regime, whereby someone intending to make a disposal and a subsequent
associated disposal can obtain Her Majesty’s Revenue and Customs
pre-clearance, so that that the disposal, in the circumstances that
have been defined, will be eligible for entrepreneurs relief? There was
a pre-clearance authorisation procedure under taper
relief.
Jane
Kennedy:
I do not believe that to be the case. Clearly, an
application for relief would be made. The case would have to be
presented as I have described. There will be occasions when the facts
of the case merit relief and other occasions when they do not. It is
not fair for someone effectively to convert a business asset into an
investment by holding on to an asset after
leaving the business. The rules are flexible, as cases vary, so they
need to cater for that. The key point, however, is that asset
disposal—the disposal of shares or shares in a
partnership—where relevant in the cessation of the business is
all part of one overall event or process. I have accepted that the
disposal does not have to take place all at one immediate
moment.
Mr.
Hammond:
The right hon. Lady said a moment ago that it
would be unfair for a retiring partner or shareholder to be able to
convert an asset into an investment asset and then secure taper relief
on it. That will not happen, because of the provision that the payment
of rent disqualifies someone from entrepreneurs relief. My examples
were deliberately constructed to present examples where the partner,
out of consideration as it were for the other partners or his
co-shareholders, was prepared to leave an asset in the business, rather
than destroy the business by insisting on selling it to a third party.
He would not receive rent, so it would not be an investment because of
the Bill’s provisions on
rent.
Jane
Kennedy:
I believe that I am right in saying that the hon.
Member for Gosport raised that issue when we began to debate
entrepreneurs relief, and we will discuss it in greater detail in the
next group of amendments—I hope that I will then have something
to say that gives some comfort to the hon. Member for Runnymede and
Weybridge. The key point is how and why the assets are being disposed
of. In response to the hon. Member for Dundee, East, if a partner
withdrew and sold everything, but was called back in the circumstances
he described—I accept that that is not uncommon—they
could still qualify for relief, if the facts of the case merited it. If
a partner came back as an employee or consultant, that, too, would not
prevent application for relief. There is some scope in the arrangements
for the kind of case described and for application to
HMRC.
The amendments
would allow some individuals to withdraw from active participation in a
business, but to continue providing assets to the business. As I said
at the outset, I believe that that dilutes the targeting of the relief
and is therefore undesirable. We do not believe that such a scenario is
a desirable target for the benefits of entrepreneurs relief in general.
The amendments would have the perhaps unintended consequence of
restricting entitlement in cases where a business ceases trading, but
the individual only disposes of their share of the business at a later
date. Under the current rules, an associated disposal may qualify at
the time that the business ceases, and the amendments would prevent
relief from being due in such
cases.
One final point
on the clearance procedure, about which the hon. Member for Runnymede
and Weybridge asked, may help. There is no clearance procedure beyond
the normal procedures for engaging with the tax office. The facts
cannot be determined in advance, but the issue was not a problem with
retirement relief. There is no reason to think that it would be a
practical problem
now.
Mr.
Hammond:
The right hon. Lady is right that the matter must
be determined on the basis of the facts. My understanding of the
pre-clearance regime under
taper relief was that the facts were set out by the taxpayer or his
advisers. In effect, the scheme that was to be undertaken was set out,
and HMRC gave a pre-clearance on the basis of approval, subject to all
the matters set out in the taxpayer’s statement being carried
out. If the taxpayer deviated or the facts changed, the pre-clearance
would be void. However, the fact that it all hinges on what happens
does not mean that it is impossible to obtain pre-clearance. If it
were, the whole concept of a pre-clearance regime would fall
apart.
Jane
Kennedy:
I hear what the hon. Gentleman says, and I want
to think carefully about his remarks and examples. I believe that the
advice that I have been given is correct, but I want to test it against
his remarks. I do not believe that the amendments are necessary for the
reasons that I have explained. They would dilute the targeting of
entrepreneurs relief. We will discuss a related issue under the next
group of amendments, when we will examine this matter further, so I
hope that he will withdraw the
amendment.
Mr.
Hammond:
I am not merely disappointed, but quite alarmed
by what the Financial Secretary has said. I thought that she would
explain how somewhere in the obscurity of the schedule, it was
perfectly clear that a disposal at a later date in the circumstances
that I outlined would be eligible for entrepreneurs relief. In fact,
she has left me more concerned than I was at the beginning of the
debate. She says that she is confident that her advice is right, but it
is not clear what that advice is. I still have not heard whether a
disposal a year or two years after an individual withdraws from a
business, in the circumstances that I have set out, would be eligible
for entrepreneurs
relief.
We must avoid
two things in this Committee. First, we must avoid creating more
uncertainty in our tax system. The eight months since the pre-Budget
report and the changes to the capital gains tax regime have been
characterised by lack of certainty and clarity, which is hugely
damaging to business interests. The thought of introducing complicated
provisions, which are clouded with uncertainty as to what would, and
would not, be allowed, and in what circumstances, and which apparently
are not capable of being subject to a pre-clearance regime, fills me
with horror.
I may be
wrong, but I anticipate that on leaving the room after this sitting, I
will hear from various professional bodies that they feel the same way.
They will agree that there is a degree of uncertainty, which is
becoming greater as the Financial Secretary attempts to answer the
questions that are raised. I am very concerned about this issue. She
has rightly observed that the next group of amendments touches on a
similar area, but it is in this area that I wish to stand in the ditch.
The next group of amendments merely pushes the envelope still
further.
Will the
Financial Secretary consider the following proposal and perhaps clarify
the issue in the next debate? If there is no pre-clearance regime, if
the provision is woolly because decisions will be made on a
case-by-case basis, and if she cannot answer specific questions at the
Dispatch Box about whether or not the examples I have given will
qualify, for the sake of clarity will she consider giving an assurance
that
HMRC will publish specific guidance, with examples, showing cases where
it would normally be expected that a disposal of an associated asset,
after the withdrawal of an individual from that business, would be
eligible for entrepreneurs
relief?
11
am
Secondly, we
must avoid inadvertently—I assume that this has been done
through inadvertence, not malice—creating a situation in which
the withdrawal of an individual from a business leads to the collapse
of that business, because the other individuals are not in a position
to acquire an asset that he holds and which is used in association with
the business. That is not an uncommon structure, and it would be a
disaster if we inadvertently created such a
situation.
Jane
Kennedy:
The hon. Gentleman talks about a pre-clearance
procedure. I understood that there was no general pre-clearance
procedure. Assuming that the Bill receives Royal Assent, guidance will
be published shortly. I want to think carefully about the hon.
Gentleman’s remarks, particularly given the importance he
attaches to this group of amendments, which is clearly based on his
interface with those groups that have been talking to him about their
impact.
Mr.
Hammond:
While I fully accept that some of the
amendments I have tabled to this schedule overtly seek to extend the
envelope of eligibility, in amendment No. 27, I am trying to
prevent our sleepwalking into excluding a group of situations which I
do not think anyone wants to exclude. Because the Minister has engaged
with that point, I shall seek leave to withdraw the amendment, but I
give her notice that we will have to return to this point. I hope that
she will consider carefully the examples that have been
offered.
If I have
missed something, and if the architecture of the Bill provides a
perfectly clear answer, and the danger that I have highlighted does not
exist—this is not a party political point—I will happily
accept that. But if that danger does exist I hope that the Government
are prepared to do something to address it. In that spirit, may I ask
the Financial Secretary whether she would be prepared to give the
Committee an undertaking that the guidance will be made available in
draft before Report so that we can understand how the Government expect
this to
work?
The
Chairman:
Order. Before the hon. Lady makes her
intervention, I must say that I take a slightly dim view of the fact
that someone who has just come into the Committee and not heard the
argument should seek to intervene. However, she has a right to do so,
and I am quite happy to call her to speak. I merely make that
observation to the Committee.
Emily
Thornberry (Islington, South and Finsbury) (Lab): I fully
intended to apologise to the Committee for missing part of the debate.
The point I am about to make may already have been clarified, but I am
keen to make it, because in certain quarters of my constituency,
perhaps surprisingly, it causes some concern. In amendment No. 27,
which I believe we are debating at the moment, I understand that after
the word “possession”, the Opposition wish to insert
“defeasible life interest”. I do not know whether that is
still the position.
The
Chairman:
Order. The hon. Lady used the right amendment
number, but the wording to which she refers was from the previous
amendment, with which we have
dealt.
Emily
Thornberry:
I am glad that matter has been dealt with, as
it is a matter of concern. It seems to amount to the same
thing.
Mr.
Hammond:
In response to your earlier comment, Sir
Nicholas, QED is the appropriate answer. If the hon. Lady reads the
Official Report she will find that the Minister has replied very
helpfully in respect of amendment No. 26, and clarified the point. I am
genuinely grateful to the Minister. I hope that we can agree that no
one is seeking to create a class of unintended losers. Goodness knows,
this Government have understood that that is not a sensible thing to
do. I look forward to seeing what the right hon. Lady brings forward,
and I beg to ask leave to withdraw the amendment.
Amendment, by leave,
withdrawn.
‘in respect
of any period commencing on or after 6th April
2006’.
The
Chairman:
With this it will be convenient to discuss the
following amendments: No. 35, in
schedule 3, page 126, line 7, at
end insert
‘and’.
No.
34, in
schedule 3, page 126, line 13, leave
out from ‘business’ to end of line
17.
No. 37, in
schedule 3, page 126, line 24, at
end insert
‘and’.
No.
36, in schedule 3, page 126, leave out
lines 28 to
31.
Mr.
Hammond:
New section 169P of the TCGA 1992 deals with the
restriction imposed in respect of the disposal of an associated asset
that has not been used entirely for business purposes throughout the
period of ownership, or where rent has been received for the use of
that asset. Although I touched on the provision in relation to the
previous group of amendments, in this case, the situation is one where
the asset during the period prior to cessation of or withdrawal from
the business has been used not wholly for business purposes, or where
rent has been received. The classic example used in such tax cases of
an asset used not wholly for business purposes is that of a farm with a
residential farm house on it. There can be no issue in principle that
where an asset is used partly for non-business purposes, some form of
apportionment must be made. That is a fair approach.
The problem is that there is no
starting date for the period over which apportionment must be made. The
wording appears to apply to a period beginning with the date when the
asset is first acquired. That means that relief will be denied in some
cases where common sense suggests that it should be available. The
amendment suggests a start date—not quite plucked at
random—of two years before the start of this tax year.
Therefore, previous use of an asset would be disregarded provided that
it has been in business use for the past two years and remains so until
the point of disposal. The two years mirror the taper relief regime
requirement. The measure is not susceptible to manipulation or
avoidance strategies, as it is dependent on what happened in a previous
period—the last two years. For the purpose of the clause, there
is nothing that anybody can do now to change the status of an asset to
claim some advantage. I hope that the Minister will respond to that
substantive point.
The second problem in proposed
new section 169P, is found on page 126 of the Bill, where four tests
are set out. Tests (a) and (b) are defined by reference to the period
in which the asset is in the ownership of the individual. Tests (c) and
(d) are defined by reference to the period that the asset has been in
use in the business. They are different tests, and it is easy to
envisage—again, using the farm land example—an asset that
may have been in use in a business for many years, but that may have
been owned by the individual in question, perhaps through inheritance,
for a significantly shorter period. There is an issue about those two
different tests.
If,
for any part of the period that the asset has been in use in the
business, the individual has not been involved in the carrying on of
the business, or if for any period rent has been received, relief is
proportionately denied. For example, in a farming business where the
land is owned separately, if the individual inherits land but the land
has been in use in the business for a longer period, entrepreneurs
relief will be partially disallowed. It appears that even if the asset
has always been used in the business, he will only be entitled to
relief for the fraction of the gain that represents the fraction of his
period of involvement in the business out of the total period of use of
the asset in the
business.
Let us put
this into numbers. Let us say that a piece of farm land has been used
by a farming business for a hundred years; if the current generation or
individual inherited the land and became involved with the farming
business five years ago, he would be entitled only to five
one-hundredths of the gain eligible for entrepreneurs
relief—that is how I and others outside the House read the Bill.
I cannot believe that Ministers intend that. If there is some obscure
provision that makes good this problem, I am sure that the Minister
will tell us. Again, we need to hear what is policy and what is
potentially a query or question mark around the drafting. Is it really
the Government’s policy that if farm land has been used for a
hundred years in association with a business, but the individual
currently making the disposal has only been involved in the business
for five years, only five one-hundredths of the gain are
eligible?
Finally,
where relief has to be apportioned, either because of the rental test
or because of the ownership or involvement tests, there is a just and
reasonable test for apportionment. To be fair, there are some bases for
what is just and reasonable set out in new section 169P(5), but we need
a commitment from the Minister to publish HMRC guidance about how the
tests will apply. The tests set out in subsection (5) are vague, to put
it mildly. They do not say specifically that every case will be a pro
rata apportionment; they simply say that regard will be had to the
various factors—length of time held and the period of
involvement. We and practitioners need to understand how regard will be
had to those factors and what formula will be applied. The Bill does
not make that
clear.
There
are also a couple of issues in relation to amendment No. 34, which
would deal with the rental issue by deleting reference to receipt of
rental as a disqualifying characteristic. We understand that a property
letting business is not in itself a trading business, but where the
asset is used for the purpose of an associated trading business, it
appears to be different. As the Minister will know, the acquisition of
assets from outside the business to be used in conjunction with the
business was positively encouraged by the taper relief regime, which
allowed taper relief for such assets. An asset that is acquired and
financed separately and let to a company or a partnership is a vital
part of the financing strategy of many small businesses. It allows
flexibility if partners change or if not all practising partners are
able to invest in the asset.
The problem with the proposed
new section is that its impact is retrospective. Even if the
arrangements were changed and rent stopped being paid now, the lack of
a start date, which I referred to earlier, means that that asset will
forever be caught by the provisions. That needs to be considered very
carefully in the context of how it undermines the financing
arrangements that are often used in small businesses and of how it
introduces added
complexity.
11.15
am
In the document
published to support the Budget note “Capital Gains Tax: Relief
on Disposal of a Business (Entrepreneurs’ Relief)”,
example 6 set out an a situation in which Mr. R has been a
member of a trading partnership for several years. He leaves the
partnership and disposes of his interest, realising gains of
£125,000, all of which qualify for entrepreneurs relief. He also
sells the partnership office building, which he owned outright but let
to the partnership, realising a gain of £37,000. I hope that the
Minister picks up on that point, because it is from the
Treasury’s note. The note
states:
“The
disposal of the office building is ‘associated’ with
Mr. R’s withdrawal from the partnership business, and
the £37,000 gain therefore also qualifies for
entrepreneurs’ relief (assuming there is no restriction on the
amount of gain qualifying for relief as a result of non-qualifying
use).”
The
phrase in brackets suggests that the non-qualifying use is the payment
of rent, but I suggest to the Financial Secretary that the term
“let to the partnership” ordinarily implies that it was
let for rent. The example given in the Budget note is at the very least
extremely confusing, because it states that where the building has been
let to the partnership, relief will be available unless there is a
non-qualifying use, but the Bill states that any letting in the normal
sense—for rent—will disqualify that asset entirely.
Perhaps the Minister will consider those points and our concern about
how that provision will distort and undermine
financing structures commonly used in small businesses and once again,
leave us with the tax system driving the business structure, which I
think we all agree is not the optimum
situation.
Jane
Kennedy:
The group of amendments would relax the
conditions under which entitlement to entrepreneurs relief for
associated disposals may be restricted. Those restrictions apply where
an asset was only partly deployed for business use or where the asset
or individual was involved in the business for only part of the
qualifying period. Amendment No. 33 would apply those restrictions by
reference to the situation after 6 April 2006, effectively disregarding
anything that happened earlier. The hon. Member for Runnymede and
Weybridge argues that we should effectively write off everything that
happened before April 2006. However, where an asset was only partly in
business use, we believe that it is right to restrict the relief, and
that is part of how the relief is targeted. I shall address his point
about rent received in the past shortly.
Amendments Nos. 34 to 37 would
remove one of the restrictions entirely so that receiving rent for the
use of an asset would not prejudice entitlement to entrepreneurs relief
on that asset. When considering the extent to which an asset was used
for business purposes, it is right to restrict the relief if the
conditions for an associated disposal were only partly met. Where an
individual receives rent for the use of an asset, the amount of
entrepreneurs relief should be restricted. Where an individual is
receiving rent in exchange for the use of an asset by a business, that
is more akin to an arm’s-length investment and is not an
appropriate target for relief.
However, the restrictions
involve looking back over the entire period of ownership of an asset,
which could involve substantial periods before the introduction of
entrepreneurs relief in April 2008, as the hon. Gentleman has pointed
out, and I acknowledge that that is considered by some to have
overtones of retrospection. Amendment No. 33 seeks to mitigate that
element by taking out of account that period of ownership before 6
April 2006.
The
restriction in cases where rent was paid for use of the asset has also
attracted adverse comment for a second reason. Receipt of rent, whether
at a market rate or otherwise, did not result in any restriction on the
availability of business asset taper relief on disposal of the asset in
question. I acknowledge the concerns voiced by the hon. Gentleman. I am
aware that the approach under the Bill differs from the taper relief
treatment of assets provided in exchange for rent. The amendments would
deal with that point by removing the restrictions altogether, but that
approach is not
appropriate.
As I
said, the hon. Gentleman has touched on a legitimate concern regarding
the receipt of rent, so although I do not believe that his amendments
are the right way forward, I undertake to consider his case for
disregarding rent received before April 2008 when assessing entitlement
to entrepreneurs relief. The hon. Gentleman asked if guidance will be
available. It will be, and I shall invite HMRC to publish draft
guidance for consideration before we discuss the matter on Report, or
sooner if possible.
Mr.
Mark Field (Cities of London and Westminster) (Con): I
thank the Minister for making that concession in relation to the
amendments, but I want to know the Government’s thinking. Part
of our confusion arises from the fact that we do not quite understand
the Government’s intentions, given the various changes in taper
relief and the desire to simplify the capital gains tax and related
regime. What is their thinking in introducing the additional level of
complication caused by working out the reliefs? Can the right hon. Lady
explain in a couple of sentences why the Government are trying to drive
forward such a complicated
proposal?
Jane
Kennedy:
As I said in my opening comments, our intention
was to consider the individual at the point at which the claim for
relief was sought. The involvement of that individual was the focus of
the work on the proposals. However, I acknowledge the criticism that
the hon. Member for Runnymede and Weybridge made of the example in the
explanatory note. I will seek to clarify the matter for consideration
on Report. The purpose of the proposal was to make sure that
entrepreneurs relief was targeted in the appropriate way as intended
when we set out the reasoning behind it. I shall return on Report to
the genuine concerns expressed by the hon. Gentleman today. I hope that
he accepts my response in the spirit in which it is intended and
acknowledges that it would not be helpful at this stage to press the
amendment to a
Division.
Mr.
Hammond:
What I am hearing from the Minister is that, as a
matter of principle, she wishes to exclude assets when rent is being
received, but that she might be persuaded that the retrospection
implied in the drafting of the Bill would be unfair and unreasonable,
at least in some cases. I am grateful to her for taking that on board.
I just hope that when we discuss the Bill on Report, other matters will
not drown out consideration of such important details and that we shall
have a proper opportunity to scrutinise the Government’s
proposals.
Detailed
points arising from other Bills are often dealt with extremely well by
our colleagues in the other place. It hardly needs to be said that one
of the great problems with Finance Bills is that we do not have the
luxury of taking a high-level view and allowing detailed issues to be
resolved up there, so we have to get it right on the first go, but in
view of what the right hon. Lady said, I beg to ask leave to withdraw
the
amendment.
Amendment,
by leave,
withdrawn.
The
Chairman:
I have received representations relating to a
stand part debate on schedule 3, and I am persuaded that a short stand
part debate would be
appropriate.
Question
proposed, That this schedule be the Third schedule to the
Bill.
Mr.
Hammond:
As we have had several debates on schedule
3, I would not rise at this stage if it were not that some issues have
arisen since amendments were tabled. I would like to run through those
five—or perhaps six—points now, in the hope that the
Minister will be able to comment on them.
There is an
overall concern that entrepreneurs relief has been lifted from the old
retirement relief. That system had become complex and, at the time it
was abolished, had begun to throw up problems. It appears that some of
those problems have been imported into the entrepreneurs relief. May I
ask the Minister to consider whether the restriction on personal
companies is appropriate in a world where the limited liability
partnership is available as an alternative business structure, and is
not subject to any such restrictions? Are the Government pushing
entrepreneurs towards the limited liability partnership route? That
would be the effect of the different treatment of partnerships and
companies. People who expect to have equitable interests below
5 per cent. would be strongly advised to go down that route,
where they would not be subject to a disqualification—which they
would be in a company—for holding less than 5 per cent. That
seems inequitable. Unless the Minister says that there is a deliberate
strategy to encourage certain types of business to go down that route,
it looks like a careless failure to update the dusted-off retirement
relief to reflect that alternative business structure, which was not
available when retirement relief was
operating.
Then there
is the whole or part of a business test for a disposal, which is
distinct from taper relief, where all business assets were eligible.
That test, which also applied in retirement relief, is difficult and
problematic and is likely to lead to complex disputes and probably
litigation.
The
second issue is transitional relief. Why did the Government set their
face against at least a transitional—perhaps five
years—lifting of the many restrictions on reliefs? Instead, they
forced a mad scramble for the exit door, with sub-optimal outcomes for
both the economy and individuals, which left many aggrieved. Would be
vendors who could not get it done in time for the abolition of taper
relief are yet another group looking forward to the opportunity to give
the Government a good kicking in a general
election.
The third
point relates to proposed new section 169I(6)(b) on page 120, line 42.
The requirement to be an officer or an employee is iniquitous because
it does not mirror the provisions in respect of limited liability
partnerships. The Government should reconsider that. If they have a
principled objection to investors who are not involved in the
day-to-day running of the business benefiting from entrepreneurs
relief, the provisions for the disposal of interests in limited
liability partnerships are defective. The practical effect is that an
investor taking a role in a limited liability partnership will be
entitled to entrepreneurs relief on the disposal of his interest, while
an investor in shares in a company, if he is not an officer or employee
of that company, will not be entitled to entrepreneurs
relief.
11.30
am
Mr.
Field:
I am following with great interest what my hon.
Friend says. Does he not think that the measure runs entirely counter
to the Government’s intention in the Legal Services Act 2007?
Limited partners, for example, have a number of outside investors
coming into law firms who are seeking to develop their business
overseas and have an outside investment. My hon. Friend’s point
is not simply an academic issue—it is something that is likely
to have practical relevance in very short
order.
Mr.
Hammond:
My hon. Friend is right, and he has much more
knowledge than I in that field of legislation. A theme is developing.
The Minister has not been particularly forthcoming in clarifying
matters, but I am seeking to understand why on the one hand there is a
clear Government policy decision to encourage one type of behaviour and
discourage another, while on the other, what we actually have is vague
drafting, a lack of clarity or the use of provisions from old,
redundant legislation, which will give rise to unintended consequences.
If we know that the Government intend a consequence and we do not like
it, we can have a political debate, but I suspect that in many areas,
it is not that the Government have deliberately set their face against
an outcome, but have inadvertently created a trap into which some
classes of entrepreneurs may accidentally fall.
The
Opposition do not advocate nominal directorship, and I have said so
already in the course of our proceedings. It would be bad legislation
if we created an environment that drove people who are passive
investors to become notional employees or officers of a company, simply
for tax relief purposes. I would like confirmation that that is also
the Government’s view. At present, there is no provision to
allow the sale of an asset used in a business before the individual
withdraws. We have discussed in relation to one of the amendments a
circumstance in which the asset is sold after the individual has
withdrawn from the business. What about the real-world scenario, where
an asset is sold before the individual withdraws? For example, a farmer
who is merrily farming his 100 acres is made an unrefusable offer by a
developer who wants to buy four acres for an enormous sum of money.
That is probably unlikely in present market substances, but let us
imagine another day when the sun is shining. Having made the decision
to sell that piece of his holding, the farmer decides that he can
retire and wishes to sell the remainder of the farm. In those
circumstances, he would not be entitled to relief on the initial sale
of the land, which may be by far the more valuable asset with a bigger
capital gain, but will be entitled to relief only on the subsequent
sale of the remainder of the farm. Perhaps the Minister will confirm
that that is the case, and whether she thinks that it is proper. I draw
attention to proposed new section 169I(8)(b), because if that farm was
operated by a partnership, the partners would be able to dispose of
that land and obtain the benefit of entrepreneurs relief. Sole traders,
however, are once again disadvantaged.
A point made
by the Law Society—I am not an expert on trusts—is that
many trustees carry on business. There are strong reasons why trustees,
particularly those controlling trusts that comprise farmland, may wish
to continue business. Under the Bill, trustees are eligible for
entrepreneurs relief only if the asset is used by a beneficiary of the
trust in the carrying-on of a business by the beneficiary. There are
also very tough restrictions on the ability of trustees to obtain
entrepreneurs relief on the disposal of shareholdings. Why is
entrepreneurs relief not routinely available to trustees when carrying
on a business in their own
right?
Finally, the
concept of a disposal being part of the withdrawal of an individual
from participation in a business is far from clear. Those who make a
living dealing with these matters think that there is scope for endless
debate and that it is inevitable that there will be litigation on what
constitutes a withdrawal. Would the
Financial Secretary come up with a crisper definition of the term
“withdrawal from business” that ordinary unadvised
entrepreneurs can understand? We must bear in mind the fact that the
maximum value of entrepreneurs relief is £80,000. We are not
talking about large-scale corporate disposals with the involvement of
lots of high-powered lawyers and accountants. In many cases we are
dealing with entrepreneurs who will have the benefit of relatively
straightforward advice from the local auditors and accountants whom
they routinely use. With that, I have concluded the exhaustive list of
points that needed to be made about schedule
3.
Jane
Kennedy:
I had hoped to have a very brief debate on
schedule 3 stand part, if any. The hon. Gentleman has raised some new
matters, but I do not accept that entrepreneurs relief is simply a
rehash of retirement relief. It shares some of the same features, but
it differs in a number of important respects. For example, there is a
shorter and simpler qualifying period and there is no minimum age for
qualification.
In
earlier debates on the schedule, we discussed why there were no
transitional provisions. A period of notice of the changes was given
when the announcement was made at the pre-Budget report, although I
accept that entrepreneurs relief was not announced until January. There
has been a period of consultation, and people had time to act if they
wished to do so. The hon. Member for Runnymede and Weybridge asked why
there was an officer or employee requirement, and said that that would
unfairly influence behaviour in an unwelcome way. I reiterate that
relief is targeted at people who have a full stake in the business.
Partners have that stake. External investors in companies do not
participate in the same way, and so are subject to an extra employee or
officer test. It is not our intention to encourage the creation of
artificial partnerships. As I have said, I will monitor the progress of
entrepreneurs relief. The hon. Gentleman asked whether passive
investors will simply become officers of the company. The officer or
employee test is a pragmatic way to check active participation in a
business. As I have said, passive investors have other tax advantage
options open to them, such as the enterprise investment
scheme.
The hon.
Gentleman asked why we should have personal company rules, and whether
all new businesses will be set up as limited liability partnerships as
a result. Businesses will continue to be set up in a variety of ways
for a variety of commercial reasons. Tax, including the availability of
entrepreneurs relief, will be just one factor that people can take into
account in deciding on the business structure that is right for them.
The differences between the capital gains tax rules for partnerships
and companies reflect their different natures. As far as entrepreneurs
relief in companies is concerned, the requirement to hold at least a 5
per cent. stake in the company strikes a fair
balance.
The hon.
Gentleman asked why there is a test on the disposal of all or part of
the business. That is part of the targeting of relief on people who
withdraw from a business. Entrepreneurs relief is not intended to
replicate the taper relief. As I have said repeatedly, entrepreneurs
relief is aimed at entrepreneurs. If relief
is to be extended to trustees who hold shares in the same company, it is
right that the individual beneficiary should have a direct stake in the
company, as well as being directly involved in the business as an
officer or employee of the
company.
We have
discussed the definition of “withdrawal from
participation”. I do not think that it is difficult to define. I
am sure that the hon. Gentleman is right about lawyers seeking to argue
the case, but the provisions in the schedule complement the simplified
capital gains tax regime with focused tax relief for entrepreneurs.
Taken together, that major reform of the capital gains tax regime will
deliver a system that is more sustainable and straightforward for
taxpayers, while remaining internationally competitive. Having answered
as many of the hon. Gentleman’s questions as I can, I hope that
he will allow schedule 3 to go forward under a fair
wind.
Mr.
Hammond:
The genesis of entrepreneurs relief took place in
the panic reaction to the tidal wave of anger that followed the
announcements in the PBR. If Treasury Ministers have learnt one thing
over the past seven or eight months, they should be trying to soothe
people who are angry. The Minister has just told the Committee that
people had a satisfactory period of notice, because they knew what the
new rules were since the PBR last year. However, they did not know what
the new rules were at all, because Downing street was briefing within
24 hours that there would be some kind of U-turn on the announcement in
the pre-Budget report. No one knew where they stood until January. Even
then, the level of trust in Government announcements was so eroded that
people were still not confident that they understood the system. The
right hon. Lady said that people had had the opportunity to act if they
wanted to, but I can tell her that that statement will provoke anger
among many people who have tried and failed to exit businesses before
the cut-off date for taper relief, having had to wait until January to
see what the final shape of the regime would
be.
The Minister told
us that the structure of the relief was designed to reflect the fact
that shareholders enjoy full participation in a business, and that
investors in a company do not. I am afraid that that just reinforces
the prejudice among Conservative Members about the Government not
understanding how smaller and medium businesses work. In practice,
limited liability partnerships and limited companies are now
alternative structures, which can be used in most cases for the same
purposes in setting up a business. There is no difference in fact, and
now a clear tax advantage is being given to the limited liability
partnership, which in itself sends a
signal.
I am
disappointed with the Minister’s response in the stand part
debate. She has said that she will return to schedule 3 on Report, and
I am grateful that she will do so. We are happy to engage in any
discussions between now and Report, so I shall not ask my hon. Friends
to vote against schedule 3 at this stage of the Bill’s
proceedings.
Question
put and agreed
to.
Schedule 3
agreed
to.
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