House of Commons
|Session 2008 - 09
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General Committee Debates
The Committee consisted of the following Members:
Liam Laurence Smyth, Committee Clerk
attended the Committee
Public Bill Committee
Tuesday 2 June 2009
[Mr. Peter Atkinson in the Chair]
(Except clauses 7, 8, 9, 11, 14, 16, 20 and 92)
Clause 23 ordered to stand part of the Bill.Schedule 6
Temporary 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 remarksat 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
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 understandingI will be grateful if the Minister confirms thisis 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 allowancesfrom 20 per cent. to 40 per cent. Will the Minister give us a flavour of the Governments 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 peoples assumption about where the economy is heading, given the scale and projected length of the downturn. It seems rather surprising
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 amendmentsamendments 28, 29 and 37tries 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 Ministers 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 Chancellors ambitious and optimistic growth
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. Friends 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.
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. Friends 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 threefoldto 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 Governments 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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|Prepared 3 June 2009