Clause
28Group
relief: preference
shares Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: Clause 28 and schedule 9 are technically detailed.
Before dealing with the arcane details of company law and what
constitutes ordinary and preference shares under schedule 9, I want to
speak briefly to clause stand part and to establish some of the
background to the measure.
As I
understand it, the clause has been triggered by the financial crisis
seen in the banking sector in the past 18 months. A ministerial
statement in December last year flagged up the change to group relief
and preference shares, saying
that “The
first proposed legislative change will better identify who are the real
equity holders in a business, for group tax purposes. This change to
the group tax rules will apply to all companies. In particular, when
banks and other financial institutions issue certain preference shares
in order to boost their Tier 1 capital base in the form approved by
financial regulators this change will ensure that their existing group
structure, for tax purposes, is not
broken. These preference shares are shares that carry a right to a fixed
dividend or a dividend at a fixed rate, but in order to satisfy the
regulatory requirements the issuer may have the right to pay a lower
dividend in certain
circumstances.” Schedule
9 deals with those
circumstances. The
change will mean that such preference shareholders will no longer be
treated as equity holders for group tax purposes solely because that
regulatory requirement is met. My understanding is that the Government
want to enable groups to claim group relief when banks issue preference
shares to shore up their tier 1 capital, even if those preference
shares do not meet the classic fixed-rate definition. The written
ministerial statement said that the
changes “will
apply retrospectively for accounting periods beginning on or after 1
January 2008”.”—[Official Report, 18
December 2008; Vol. 485, c.
126-127WS.] I
would like to make some more detailed comments on the schedule, but I
would be grateful if the Minister could confirm that that statement is
the genesis of schedule 9 and that the change relates not only to the
financial crisis, but to broader issues around the definition of shared
capital.
The
Chairman: Order. I remind the Minister not to be tempted
to discuss schedule 9, because we shall come to that
next.
Angela
Eagle: I am happy to confirm the basic analysis of the
genesis of clause 28 and future
schedules. Question
put and agreed to.
Clause 28 accordingly ordered to stand
part of the Bill.
Schedule
9Group
relief: preference
shares
Mr.
Hoban: I beg to move amendment 23, in
schedule 9, page 103, line 2, at
end insert— ‘A1 (1) Section
832(1) of ICTA is amended as
follows. (2) For the definition
of “ordinary share capital”,
substitute— “ordinary
share capital”, in relation to a company, means all the issued
share capital (by whatever name called) of the company, other than
relevant preference shares (within the meaning of Schedule
18).’.
The
Chairman: With this it will be convenient to discuss the
following: Government amendments 10 to
12. Amendment
24, in
schedule 9, page 104, line 39, after
‘by’, insert ‘paragraphs 1 to 4
of’. Amendment
25, in
schedule 9, page 104, line 43, at
end insert— ‘(6A) If a
company so elects, the amendments made by paragraph (A1) of this
Schedule, do not have effect in relation to shares issued by the
company— (a) before the
date on which this Act is
passed; (b) on or after that
date under an agreement entered into before that
date.’. Amendment
26, in
schedule 9, page 104, line 44, after
‘6’, insert ‘or
6A’.
Mr.
Hoban: My amendments are dry and technical. They define
“ordinary share capital” more closely by reference to
another term in the Bill, “relevant preference shares”.
The objective is to ensure that group relief is available when certain
preference shares are issued. The holders of fixed rate preference
shares are not usually treated as equity holders. Schedule 9 changes
that, so holders of relevant preference shares will not be treated as
equity holders. It is important because those determinations affect the
entitlement to group relief from related companies for trading
losses. Amendments
23 to 26 tidy up the definition of “ordinary share
capital”. The test of a grouping for many tax purposes involves
two parts: an ordinary share capital test and an economic ownership
test based on the provisions of schedule 18 of the Income and
Corporation Taxes Act 1988. Ordinary share capital is defined in
section 832(1) of the 1988 Act
as “all
the issued share capital (by whatever name called) of the company,
other than capital the holders of which have a right to a dividend at a
fixed rate but have no other right to share in the profits of the
company”.
According to
the 1988 Act, if the holder does not have a fixed-rate preference
share, they must have an ordinary share. The challenge arises because
the rate on the preference share may vary. Although the definition of
ordinary share capital includes an exclusion for shares that carry a
dividend at a fixed rate and is similar to the definition of fixed rate
preference shares in schedule 18 of the 1988 Act, the two are not the
same. As a result, it is possible for a share to be treated as part of
the ordinary share capital and as a fixed rate preference share for the
purposes of schedule 18. The concern expressed to me is that the
introduction of the definition of “relevant preference
shares” would increase the circumstances that could give rise to
that confusion. Amendments 23 to 26 bring the two definitions into
line, so that an ordinary share is defined as something that is not a
relevant preference
share. The
Government beat us to the punch with amendments 10 to 12, in
that we wanted to table amendments with a similar effect. We welcome
the Govt
amendments.
Angela
Eagle: I feel that it would be beneficial to address the
amendments in the name of my right hon. Friend the Financial Secretary,
as they clarify the legislation. I welcome the fact that they have been
widely welcomed across the Committee. I will then discuss the other
amendments in the
group. The
three Government amendments address representations made regarding the
draft legislation for schedule 9. The schedule amends rules identifying
how companies are to be regarded as belonging to the same group for tax
purposes. The hon. Member for Fareham may be right to say that this is
a technical and arcane matter, but it is important to a lot of grouped
companies to be able to access the privileges that come with that
status.
Currently,
where a parent company of a group holds more than 75 per cent. of the
equity in a subsidiary company, the group can benefit from rules that
allow it to surrender or claim losses from companies in the group. A
number of anti-avoidance rules also apply when a company or an asset
leaves a tax group. The 75 per cent. equity rule was originally
a straightforward test in the 1970s when the original tax rules were
formed;
they were then consolidated in the 1980s and still govern those areas of
taxation. That rule has had to evolve to prevent avoidance, as the
financial affairs of groups of companies have become more complex over
time. Now, the parent company also needs to enjoy the full rights of an
equity holder. Usually, those are rights attached to the ordinary
shares in a company, although they might also be subject to the rights
of other shareholders and certain creditors. The limitations on the
types of preference shares that can be issues to external investors
without threatening the structure of a tax group creates a particular
problem for financial groups that need to raise additional tier 1
regulatory capital. The changes
in the schedule resolve that problem, and I think that they have been
welcomed. However, we have received representations stating that,
because the only circumstances in which the rules are being relaxed
relate to either regulatory capital constraints or companies in severe
financial difficulty, that might not cover circumstances in which a
company simply has insufficient retained profits to pay a full dividend
on its preference shares. Therefore, the three Government amendments,
taken together, remove any doubt that the circumstances in which
dividends can be reduced or not paid refer only to the terms on which
the shares are issued. Amendments 10 and 11 therefore refer
specifically to the terms of the share issue. A consequent change is
made by amendment 12, removing a now defunct reference to
the payment of
dividends. The
amendments clarify that relevant preference shares do not lose that
status simply because the company has insufficient profits to pay the
full dividend. That includes circumstances in which a company has no
profits to distribute, so that any dividend would be ultra vires, and
where a dividend paid by a regulated financial institution would breach
rules on capital adequacy.
Amendments 23
to 26, which were tabled by the hon. Member for Fareham, would take the
changes made to the rules for tax groups by schedule 9 outside that
field and into all manner of other areas of the Tax Acts. It might not
have been fully appreciated by the hon. Gentleman when he tabled the
amendments, but section 832 of the Income and Corporation
Taxes Act 1988 is headed, “Interpretation of the Tax
Acts”. It is a general definition section, whose definitions are
intended to apply to many rules throughout the Acts and in a variety of
different circumstances. The definition of ordinary share capital is
one of those which applies for many purposes throughout the Taxes
Acts.
There are two
principal arguments against amendments 23 to 26. First, they
are unnecessary. The objective of schedule 9 is to address specific
problems that some groups have experienced as a result of the turmoil
in the global economy, particularly in the financial sector, over the
past year. Those problems do not relate to section 832 of the Income
and Corporation Taxes Act. The groups that lobbied for changes have no
problems with that section: their problems relate purely to schedule 18
to that Act. We have received positive and welcome feedback on the
changes contained in schedule 9, and the amendments I have tabled will
achieve what is needed in that respect.
Secondly, as
I have indicated, it seems to me to be dangerous to amend a definition
that affects dozens of separate parts of the Taxes Acts purely to
achieve a change in one part. Analysing the effects
of such a
change would be a large undertaking, and I am pretty sure that it would
throw up some undesirable and unintended consequences. That is not the
right way to achieve a focus on the particular area about which the
hon. Gentleman is worried. If
businesses are experiencing problems with the definition of ordinary
share capital in other specific areas of taxation law, HMRC will be
pleased to receive representations from them about it. Consideration
will then be given to whether changes are necessary to the definition
of ordinary share capital for those specific areas. I hope that the
hon. Gentleman appreciates that undertaking. If other specific problems
are brought to our attention we will certainly try to address them, but
tackling a specific issue by attempting to change a general definition,
which could have undesirable effects throughout the Taxes Acts, is a
recipe for large numbers of unintended consequences that would make
themselves known subsequently. They might have consequences for
avoidance activity or a range of other undesirable outcomes, which I am
sure the hon. Gentleman certainly did not intend when he tabled the
amendments.
6.45
pm The
changes brought about by schedule 9 provide companies with greater
flexibility in how they raise capital from external investors, without
compromising their right to the benefits of being part of a tax group.
That will assist a number of banks that are seeking to bolster their
regulatory capital and help to protect depositors. We will achieve our
aim in ways that will not adversely affect any group or detract from
the essential anti-avoidance purpose of the tax rule that is amended. I
therefore urge the Committee to accept the Government amendments and
the hon. Member for Fareham to not press
his.
Mr.
Hoban: I am grateful for that explanation. It reflects
part of the challenge of tax law in this country. To address one issue
we create a new definition, which then throws up anomalies regarding
other definitions. To use an architectural metaphor, we create a
baroque monstrosity of a tax system rather than a classical building. I
do not know if there is much scope to have a tax law in the current
exhibition on the baroque at the Victoria and Albert Museum. It would
be an interesting interpretation of baroque to have tax law exhibited
there. Not wishing to digress too far, there is a tax museum in Siena,
which has remarkable pieces of art depicting the business and commerce
in Siena. I think that that is more renaissance than
baroque. Coming
back to the topic, I understand the Minister’s point. This is a
challenge that we face in trying to amend law. My amendment was
over-ambitious for the occasion, and those who suggested it to me will
have noted the Minister’s undertaking and will reflect on it. On
that basis, I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Amendments
made: 10, in
schedule 9, page 103, line 28, leave
out ‘in any circumstances’ and insert
‘by virtue of any term subject to
which the shares are issued or
held’. Amendment
11, in
schedule 9, page 103, line 39, leave
out ‘in any circumstances’ and insert
‘by virtue of any term subject to
which the shares are issued or held’.
Amendment 12,
in
schedule 9, page 104, line 14, leave
out sub-paragraph (i).—(Angela
Eagle.)
Mr.
Hoban: I beg to move amendment 22, in
schedule 9, page 104, line 21, at
end insert— ‘(6A) An order
under sub-paragraph (5) must specify that no company may be regarded as
being or having been in severe financial difficulties in any accounting
period during which it agrees or agreed to contribute to, or increases
or increased the value of, the pension arrangements of any director or
former director a sum in excess of £1
million.’. This
is the Fred Goodwin memorial amendment. Schedule 9 talks about a
business reducing or failing to pay the dividend on a preference share
in relevant circumstances, and it goes on to define those relevant
circumstances as being
when “at
the time the dividend is or would be payable, the company is in severe
financial
difficulties”. The
schedule does not define what severe financial difficulties are. I move
the amendment as a probing one, to get the Government to set out more
clearly what they see as severe financial difficulties. I think that
the letter that has been placed in the Library in respect of the
amendment says that the vast majority of businesses may clearly fall
within or without the everyday meaning of that phrase. That is a
perfectly fair thing to say, but we know that RBS was in severe
financial difficulties and needed to be bailed out by the Government,
not just once but twice. However, RBS’s financial difficulties
were not that severe that it could not augment the pension of its chief
executive. That makes it rather difficult to understand what severe
financial difficulties means, and it would help to have some clarity
from the Government. If banks are able to spend significant sums on
discretionary activity, would that not suggest that they are not in
severe financial difficulties? I would be grateful if the Minister
could elaborate a bit more carefully on that phrase before I think
about whether to press the amendment to a
vote.
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