Group 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
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.
Group relief: preference shares
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;
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
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.
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 Ministers 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 Ministers 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.)
(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, RBSs 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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