Mr.
Hammond: I beg to move amendment No. 205, in
schedule 25, page 310, leave out lines 5
and
6.
The
Chairman: With this it will be convenient to discuss the
following amendments: No. 206, in
schedule 25, page 310, leave out lines 12
and 13. No. 207, in
schedule 25, page 310, leave out lines 16
to
20.
Mr.
Hammond: Paragraphs 24 and 25 of proposed new schedule A1,
which will be inserted in the Capital Allowances Act 2001, set out the
circumstances in which the payable tax credit must be repaid. If there
is a disposal within four years, part or all of the credit will be
clawed back. One would clearly expect such a provision in legislation
of this type. However, as drafted, the clawback will catch intra-group
transfers where ownership of an asset changes, but a continuity of
business provision applies: in other words, a transfer subject to
section 343 of the Income and Corporation Taxes Act 1988, where the
legal owner of the asset changes but the beneficial ownership and
control on an intra-group transfer does not.
I suggest that
it is inappropriate to claw back payable tax credits simply because the
ownership of the asset has shifted within a group of companies where a
continuity of business provision is in effect. Proposed new paragraphs
25(5)(a) and 25(7)(a) already deal with situations in which assets are
disposed of at arm’s length. Sub-paragraphs (5)(b) and (7)(b)
deal only with transfers intra-group, which are subject to the
provisions in section 343 of ICTA 1988. The amendments would delete
those two sub-paragraphs and sub-paragraph (8), which provides a
definition, so that there will be no clawback where the transfer of
ownership of the asset is an intra-group transfer and the business
continuity provisions of the Income and Corporation Taxes Act 1988
apply. If the
Exchequer Secretary is not prepared to accept the amendment, can she
explain what risk to the Exchequer needs to be dealt with in this
regard? It is not obvious that there is any scope for abuse or
avoidance created by excluding intra-group transfers
from the clawback provisions. Our concern is that corporate
reorganisations will be unnecessarily inhibited, but obviously if there
is a serious avoidance issue, we will be pleased to hear what that is
from her and certainly give it proper
consideration. Angela
Eagle: I hope that I can explain the avoidance potential
and persuade the hon. Gentleman not to push his amendment, which seeks
to undermine the effectiveness of the clawback mechanism included in
the first-year tax credit regime. That mechanism is intended to protect
the Exchequer by preventing a business from claiming first-year tax
credits for an asset and then immediately selling it on. Where a
company sells an asset that has been subject to a tax credit claim
within the clawback period, we will potentially claw back, by means of
an assessment, any tax credits paid. However, the company will be able
to keep the tax credits that relate to any loss made on the disposal of
an asset. If the asset is scrapped, there will be no
clawback. The
amendments would withdraw the potential for a clawback of first-year
tax credits where a company transfers an asset as part of the transfer
of a trade and one of the continuity of business provisions
applies—in other words, intra-company transfers. The continuity
of business provisions state that in certain circumstances where an
asset is transferred from one company to another as part of the
transfer of a trade, transfer of the asset is ignored as a disposal
event for capital allowance purposes. The result is that the successor
company gets the same capital allowance and charges as the predecessor
company would have done if it had continued to carry on the
trade.
However, such
an asset transfer must be treated as the disposal of the asset for
first-year tax credit purposes and the clawback will be considered if
the asset transfer took place within the clawback period. Without such
a provision, the company could easily avoid a clawback charge by
transferring the asset with its trade to a new company in the same
group. The successor could then immediately sell the asset without
being subject to a clawback charge, as it had not received a tax credit
in the first place. The amendment would therefore undermine the
integrity of the first-year tax credit regime, so I hope that the hon.
Gentleman will agree that there is a potential problem here and
withdraw his amendment as a result of my
explanation.
Mr.
Hammond: I am grateful to the hon. Lady. She has given an
example in which a tax-avoidance ruse could be introduced. It strikes
me that another way of dealing with this, which would avoid any
impediment to ordinary corporate reconstruction or reallocation of
assets within a group, would be to ensure that the clawback provision
persisted so that the potential for clawback was not only on the first
transfer, but persisted for future transfers. I think that she was
saying that, if a transfer were made without clawback, a future
transfer outside the group would not be subject to clawback, which
would give rise to a potential for avoidance.
I would like to accept the hon.
Lady’s point, as she makes a good case against the amendment as
it is drafted, but I would prefer the solution to be in provisions that
allowed the clawback ability to persist and endure beyond the first
transfer. That way, so long
as transfers were made intra-group, they would be okay, but if one were
subsequently made outside the group, the clawback would be applied to
the transferee within the group who had received the transfer of the
asset from the original company that received the payable
credit. I will not
pursue that at this stage, because that is clearly an issue of
substance, but I think that I have a difference with the Exchequer
Secretary over how best to address the avoidance concern. I want to go
back and check how significant the concern about inhibiting intra-group
transfers really is, and whether it is something that we need to ask
the Government to look at again on Report. I beg to ask leave to
withdraw the amendment.
Amendment, by leave,
withdrawn.
Question proposed, That
this schedule be the Twenty-fifth schedule to the
Bill. 6.15
pm
Mr.
Hammond: I have one additional point that was not
contained in any amendment. That is because it was drawn to my
attention too late and because when amendments are tabled, Sir
Nicholas, it gives Ministers too much notice. It is always good to have
one that they do not have notice of so that we can see how they do.
— [Interruption.] It will be the Financial
Secretary’s turn soon.
Can the Minister tell the
Committee how the upper limit for payable first year tax credits, which
is set at the higher rate of £250,000, and taxpayers PAYE plus
the NIC contributions bill, interacts with payable R and D tax credits?
That is a simple question. Can she confirm that, if a company has
claimed R and D tax credits, the full upper limit for payable first
year tax credits would still be available to it—there is no
offsetting of one against the other, it does not use up its entitlement
to first year tax credits if it has already claimed payable R and D
credits?
Angela
Eagle: There I was, putting my glasses away, but it was
too early. I can confirm that the R and D cap and the first year tax
credit upper limit are completely separate. There is no interrelation
of the sort suspected by the hon. Gentleman.
Question put and agreed
to. Schedule 25
agreed to.
Clause 77 ordered to stand
part of the Bill.
Clause
78Small
pools
The
Financial Secretary to the Treasury (Jane Kennedy): I beg
to move amendment No. 145, in
clause 78, page 42, line 33, at
end insert— ‘(5) The
Treasury may by order substitute for the amount for the time being
specified in subsection (3) such other amount as it thinks
fit. (6) An order under
subsection (5) may make such incidental, supplemental, consequential
and transitional provision as the Treasury thinks
fit.’.
The
Chairman: With this it will be convenient to discuss
amendment No. 215, in clause 78, page 42, line 33, at end
insert— ‘(5) The Treasury
may by order substitute for the amount for the time being specified in
subsection (3) such greater amount as it thinks
fit. (6) An order under
subsection (5) may make such incidental, supplemental, consequential
and transitional provision as the Treasury thinks
fit.’.
Jane
Kennedy: Thank you, Sir Nicholas, and welcome back after
your holiday.
The
Chairman: Holiday? Certainly
not.
Jane
Kennedy: My hon. Friend suggests “break” as
an alternative, during which, I have no doubt, you worked extremely
hard in the interests of your constituents and of the Committee,
scrutinising the amendments being tabled and selecting those suitable
for consideration. It is a pleasure to be here under your
chairmanship. The
amendment is in my name, but perhaps it would be helpful to the
Committee for us to have a slightly wider discussion about the purpose
of the clause. Clause 78 builds on the simplification provided by the
introduction of the annual investment allowance. It delivers a further
simplification of the capital allowances scheme, which will be of
particular benefit to the smallest businesses, although I know that
Opposition Members do not share that view.
The measure is a direct response
to suggestions made during consultation on the capital allowances
reforms over the past year. It will enable businesses to accelerate the
tax relief that they receive by claiming and writing down the allowance
for all of their unrelieved capital expenditure on plant and machinery,
where the unrelieved expenditure in either or both their main and
special rate pools does not exceed £1,000. As businesses will no
longer have to calculate writing down allowances on very small balances
each year, that will result in a significant administrative burden
saving, provide a modest cash flow boost and encourage further
investment. The introduction of the measure will enable businesses to
write off 536,000 main rate pools and 600 special rate pools in the
first year. Allowing pools to be written off in this way avoids the
need to write down pools over a very long periods, in some cases beyond
the economic life of the asset. It is therefore in line with the wider
principle of aligning capital allowances to the economic life of the
asset. After the
Finance Bill was published we received further representations to the
effect that the small pools limit should be kept under regular review,
and amended as and when appropriate. Both the Opposition’s
amendment and our amendment seek to respond to those representations.
They both introduce a Treasury power into clause 78, enabling the small
pools limit to be varied by secondary legislation. The difference
between the two approaches, and the reason I ask the Committee to
reject the hon. Gentleman’s amendment—unless it is a
probing one—is the flexibility that that power
provides.
The
Opposition’s suggested power only allows the increase of the
small pools limit. I think that I understand why the hon. Gentleman
suggests that. Our amendment mirrors our approach in other clauses in
this part of the Bill. It allows us to increase or decrease the limit.
However, I agree with Opposition Members that it is much more likely
that the limit will be increased. It may be, however, that wider
economic circumstances and the benefits of the AIA mean that in future
years a lower limit would achieve the same benefit to business. It is
also possible that in the face of abuse, the Government of the day may
wish to reduce the limit. I believe, therefore, that the Opposition
amendment would tie the hands of a Government wishing to react to the
evidence and changing circumstances in the most appropriate way. That
is the purpose of our amendment and that is why I think that it is
preferable to that of the hon. Member for Runnymede and Weybridge, but
I would be interested to hear what he has to
say.
Mr.
Hammond: The Financial Secretary has set out the case for
both my amendment and for hers. I was fascinated by the fact that she
knows that there are 536,000 main rate pools that will be written off
by the amendment. It is interesting that somebody at the Treasury or
HMRC is counting them. I am wondering how they would get the figure.
Presumably they would have to go into the individual tax computations,
look at the pools and assess how many of them were above or below
£1,000. I do not want to dismay any officials in the room, but I
am minded that Sir Peter Gershon might be interested that somebody has
been going through all the returns and checking how many pools there
are below
£1,000.
Jane
Kennedy: The hon. Gentleman may be interested to know that
I am told that 618,000 businesses have main pools of between £1
and
£1,000.
Mr.
Hammond: I apologise. I thought that the right hon. Lady
said 536,000. In her opening remarks she must have given a different
figure. There are clearly two people in HMRC counting pools, or perhaps
more than two people. Perhaps it is more than one-man-year’s
worth of work, but valuable work it
is. The Financial
Secretary has essentially made the case. We have a difference of view.
We think that this is a good measure; we support the underlying measure
in clause 78. However, it is a shame that the Government have spoiled
it by seeking to take a power that would allow them to reduce the
£1,000 cap on small pools that can be written
off. It
is entirely reasonable to take a power to allow the cap to be
increased. As I said earlier—I believe that the Financial
Secretary was not in the room—we understand that it would not be
appropriate to index, to have a tedious indexing of small amounts every
year. However, we would welcome an assurance from the Financial
Secretary that the Government’s intention was to periodically
uprate the cap so that it rose broadly in line with inflation. If we
gave the Government power by order to cut the cap, effectively to
nullify a measure that Parliament had agreed, the right hon. Lady could
cut it to £50 or £20, removing much of its benefit. That
is why
we sought to ensure that this was an upward-only
revising provision. I accept that the Government amendment is
necessary. Our amendment would have been preferable, but I am not about
to ask my hon. Friends—all three of them—to vote against
the Government amendment. I hope that the Minister will reflect on my
comments. Amendment
agreed
to. Clause 78,
as amended, ordered to stand part of the
Bill. Clause 79
ordered to stand part of the
Bill.
Schedule
26Special
rate expenditure and the special rate
pool Question
proposed, That this schedule be the Twenty-sixth schedule to the
Bill.
Mr.
Hammond: I did not wish to move amendment No. 216, but I
want to ask the Financial Secretary a question. It was raised at the
open day by the Chartered Institute of Taxation. Can she explain how an
election under section 198 of the Capital Allowances Act 2001 will
apply in circumstances when an election is made under paragraph 16 of
schedule 26, as an election under paragraph 16 can be made only at tax
written-down value? Section 198 of the 2001 Act is an election to
apportion sale price on the sale of a qualifying interest. I should be
grateful if the right hon. Lady could explain to the Committee how that
works. I am sure that she is briefed on such an issue because it was
raised at the open
day.
| 
