Finance Bill

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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 78

Small 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.
Angela Eagle: Break.
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 26

Special 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.
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