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Session 2008 - 09 Publications on the internet General Committee Debates Finance Bill |
Finance Bill |
The Committee consisted of the following Members:Liam Laurence Smyth,
Committee Clerk † attended
the Committee Public Bill CommitteeTuesday 2 June 2009(Afternoon)[Mr. Peter Atkinson in the Chair]Finance Bill(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92)4.30
pm Clause 23
ordered to stand part of the Bill.
Schedule
6Temporary
extension of carry back of
losses Mr.
Mark Hoban (Fareham) (Con): I beg to move amendment 31, in
schedule 6, page 90, line 44, leave
out ‘£50,000’ and insert
‘£100,000’.
The
Chairman: With this it will be convenient to discuss the
following: amendment 32, in
schedule 6, page 90, line 46, leave
out ‘£50,000’ and insert
‘£100,000’. Amendment
37, in
schedule 6, page 91, line 27, leave
out ‘24 November’ and insert ‘31
December’. Amendment
33, in
schedule 6, page 91, line 31, leave
out ‘£50,000’ and insert
‘£100,000’. Amendment
28, in
schedule 6, page 91, line 32, leave
out ‘24 November 2009’ and insert ‘31 December
2010’. Amendment
34, in
schedule 6, page 91, line 33, leave
out ‘£50,000’ and insert
‘£100,000’. Amendment
29, in
schedule 6, page 91, line 34, leave
out ‘24 November’ and insert ‘31
December’. Amendment
30, in
schedule 6, page 91, line 37, at
end insert— ‘(3A) The limits
referred to in subsubparagraphs 3(a) and (b) shall not apply to the
accounting period immediately preceding the relevant accounting period
in which the trading loss
arose.’. Amendment
36, in
schedule 6, page 91, line 38, leave
out subsections (4) and
(5). Amendment
35, in
schedule 6, page 91, line 41, leave
out ‘£50,000’ and insert
‘£100,000’.
Mr.
Hoban: It is a pleasure to serve under your chairmanship,
Mr. Atkinson. Having spoken in the opening minutes of the
first sitting, I shall now, in the sixth sitting, make some more
substantive remarks—at least I hope that they will be more
substantive than what I said previously.
It might help
the Committee if I give some background to the schedule before
discussing in detail the amendments, which are probably not
comprehensible without an explanation. Clause 23 and schedule 6 provide
a temporary extension for carrying back trade losses for income tax and
corporation tax. The provisions were originally
announced in the pre-Budget report in 2008. They will enable both
incorporated and unincorporated businesses to carry back their losses
for three years.
The
assumption is that, in the current economic conditions, a number of
businesses would make losses. They are currently allowed to carry back
their losses for one year, and they then carry their losses forward.
Extending the carry-back by a further two years will give businesses a
cash-flow advantage by reducing their tax bills for previous years. In
effect, a business that expects to be profitable in future can utilise
its loss relief now, rather than when it returns to profit, in a way
that will generate further cash-flow advantages. The Budget changed the
temporary extension from one year to two so that a company that makes a
loss in 2008-09 or 2009-10 can claim tax relief for its loss. The
losses that can be carried back have been capped at £50,000 a
year, and amendments 31 to 35 would increase that limit to
£100,000. I shall say a little more about that in a
moment.
My
understanding—I will be grateful if the Minister confirms
this—is that the rules mean that the taxpayer will get the
benefit at the highest rate of tax that they pay. Someone who runs an
incorporated business and pays tax at 40 per cent. will receive a
benefit of up to £20,000, whereas as a business paying a
combination of the starting rate or the basic rate of tax in previous
years would receive a significantly lower sum. A company paying tax at
the main rate would receive a maximum benefit of £14,000, while
a company paying tax at the small company rate would receive less. The
relief seems to provide more help to businesses who pay higher rates of
tax; effectively, it provides a subsidy to businesses that are making a
loss.
As I said
earlier, the scheme announced in the pre-Budget report allowed only one
year of losses to be carried back. However, a number of representations
were made prior to the Budget, and the Institute of Chartered
Accountants suggested that two years’ losses should be available
for carry-back. The Government obviously listened, but a significant
cost is attached to that change.
The total
cost of the measures announced in the pre-Budget report and the Budget
is £475 million, which is £180 million for the relief
announced in the pre-Budget report 2008 and a further £295
million for the measures announced in the Budget. In the next clause we
will consider the temporary increase in first-year
allowances—from 20 per cent. to 40 per cent. Will the Minister
give us a flavour of the Government’s thinking about how they
decided to split their finite pot of money for helping businesses
between the loss relief provisions we have been debating and the
first-year allowance provisions that we will debate under the next
clause? Will he also clarify just how the Government came to their
estimates of the costs of the
measure? Many
people looking at this matter will think that perhaps, given the
current economic climate, many businesses will be making losses and
those losses will be available for carry-back. However, when I looked
at the regulatory impact assessment that supports the measure, it
surprised me that the Government had estimated that only 1 per cent. of
incorporated taxpayers and 2 per cent. of companies would benefit from
the proposal. That seems at odds with people’s assumption about
where the economy is heading, given the scale and projected length of
the downturn. It seems rather surprising
that the proportion of businesses that the Government expect to benefit
is particularly low. If that is a forecasting estimate—the
Treasury is good at getting its forecasts wrong—the cost to
taxpayers could be significant. If the figures are out by a factor of
three, we are talking about a cost to the Exchequer of £1.5
billion, rather than £500 million. What comfort can the Minister
give us about the cost of the measure, and how certain is he that the
cost estimates in the Red Book are
correct? I
have tabled three sets of amendments to this schedule. The first are
very much probing amendments that would increase the threshold of
losses from £50,000 to £100,000. I am trying to
understand why the threshold was set at £50,000 rather than
£100,000, or a lower amount. Clearly, this is a matter of
changing the timings for businesses getting relief for losses made.
There is a cash cost from increasing the threshold from £50,000
to £100,000, but over the lifetime of a business, there should
be no total tax loss to the Exchequer. Will the Minister explain why
the Government chose to set the limit at
£50,000? The
second set of amendments—amendments 28, 29 and
37—tries to tidy up some of the drafting in the schedule. The
dates that are used in the schedule are based on the date of the
pre-Budget report in November 2008, so we have an odd accounting
period, ending on say 23 November 2010. This set of amendments would
move the accounting date to coincide with the more normal year end for
businesses: 31 December
2010. Hon.
Members might ask whether that means that we are likely to increase the
level of loss available for relief against profits in previous years,
but again, because of the way the schedule is drafted, there is a cap
of £50,000. I do not believe that that would increase the amount
of losses that taxpayers would be able to relieve by virtue of the
schedule. It would just tidy up the accounting dates and make tax
compliance easier, from the perspective of businesses, meaning that
they could look at their losses for an entire year rather than for
parts of the
year. Amendment
30 addresses any confusion that there might be about how the cap will
operate. Paragraph 3(3) sets out £50,000 as the limit for losses
carried back for periods between 23 November 2008 and 24 November 2009,
and the same limit for losses carried back for periods between 23
November 2009 and 24 November 2010. I assume that that is intended to
mean that, no matter how many accounting periods end after
23 November 2008 and before 24 November 2009, the maximum
extended carry-back total is still £50,000. If that is the
correct interpretation, paragraph 3(4) is redundant, because it sets
out rules for cases in which losses are made under a shorter accounting
period and the carry-back is then in proportion to £50,000 at an
annualised rate. If losses are capped strictly at £50,000, we do
not need paragraph 3(4), hence my amendment to remove it. If the
intention of paragraph 3(3) is not to cap the amount at £50,000
in a 12-month period, the provisions need to be
redrafted. I
have a couple of final points. The Institute of Chartered Accountants
has done rather well in arguing its case for a second year of losses
and has decided to push the Minister’s patience a bit more by
asking the Government, given the continued economic uncertainty, to
make it clear that there is still a window open for a review, perhaps
next year, if the economy has not improved, if the Chancellor’s
ambitious and optimistic growth
forecasts have not been realised and if the recession goes on for longer
than expected. It has asked whether the Government could look at a
further year or more of carry-back, and I would be grateful for the
Minister’s comments on that.
Mr.
Graham Stuart (Beverley and Holderness) (Con): My hon.
Friend is giving a powerful speech on a technically challenging area. I
declare an interest, both as a director of an incorporated business and
a partner in an unincorporated business. The unincorporated business,
interestingly enough, has a year end of 30 April, and unincorporated
businesses with that year end will find on 30 April 2010 that they will
be unable to use the relief because it will finish with the end of the
tax year a few weeks before. That seems to be unfair on unincorporated
businesses, when compared with the impact on incorporated businesses,
which can continue if their year end stretches up to November 2010.
Does my hon. Friend sympathise with their
position?
Mr.
Hoban: I am grateful to my hon. Friend for raising that
question. That is part of the challenge, because, as he stated when we
discussed the reduction in small companies tax on the Floor of the
House, there is a range of models for the legal structure of
businesses, and some partnerships or unincorporated sole traders will
be seeking to take advantage of that. Some incorporated businesses will
also seek to take advantage of that, and the regulatory impact
assessment sets out the proportion of people in that category. The
Government expect the measure to be taken up by about 15,000 people.
They will be self-employed, but deemed to be partners in companies, so
it will obviously affect them. I do not know the size of my hon.
Friend’s company, but of the 75,500 businesses that could
benefit, the Government expect 30,000 small to medium-sized companies
and 5,500 large companies to do so. We need to ensure that the rules
are reasonable and fair and that the compliance costs are kept under
control as well. That is one reason for my proposed date change, which
I commented on
earlier. 4.45
pm My
hon. Friend asked about businesses with a year end on 30 April. The
risk is that they will end up having to shift the two-year period, so
that profits made in earlier years do not apply. However, I am sure
that the Minister will want to respond to my hon. Friend’s
comments
directly. Finally,
some are concerned about the interaction between paragraphs (1) and (2)
of schedule 6 and the anti-avoidance and sideways loss relief
provisions in section 74A of the Income Tax Act 2007. I have been asked
whether the operation of provisions in section 74A will
restrict the losses that can be used in the current tax year and each
of the three preceding tax years. The purpose of the discussion is
threefold—to ask the Minister about tidying up the accounting
periods; to look at the way in which paragraph 3(3) works in practice
and whether paragraph 3(4) is redundant; and to probe the
Government’s thinking on the cost of this measure. Is this the
most effective way of providing relief to businesses? Have the
Government accurately estimated the cost to the Exchequer of
introducing this measure?
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