Angela
Eagle: I congratulate the hon. Gentleman on the
opportunistic nature of the amendment. It demonstrates that creativity
lurks everywhere. [Laughter.] One day, I might ask
him what his secret is.
Amendment 22
seeks to address matters that are not directly relevant to schedule 9
but are relevant to the content of regulations that the Treasury could
make under the power contained in the proposed new section of the
Income and Corporation Taxes Act 1988, which is inserted by paragraph 3
of the schedule. The amendment raises a topical issue—that of
so-called rewards for failure, which none of us regard as a good thing.
However, if it is aimed at directors who bear responsibility for the
financial difficulties of a company, particularly directors who no
longer work in the group, it will miss its target. The consequences of
the amendment would fall on the current employees and shareholders of a
business if it was denied the opportunity to have its group structure
recognised by the tax system, rather than on those who had done the
damage and fled bearing the rewards of failure.
The amendment
would apply whenever pension benefits in excess of £1 million
were granted to directors, irrespective of whether the company, the
shareholders or anyone else believed that a particular director had
been instrumental in the failure of the company. It would always be
possible, as I am sure the hon. Gentleman realises, to pay pension
benefits of slightly less than £1 million, in which case the
entire point of the amendment would be lost. The hon.
Gentleman asked what constituted “severe financial
difficulties”. The phrase is fairly self-explanatory. It does
not cover companies with temporary cash flow problems, or circumstances
in which they could acquire funds from related companies or other
sources. If there is genuine doubt, however, we are prepared to do
whatever we can to provide companies with certainty of
treatment.
The phrase
does not cover contrived situations. If we were to become aware that
some groups were attempting to use the relaxation provided by the
change to manipulate tax group structures—in effect, to say who
is entitled to claim group relief or some other tax relief—then
we would be prepared to remove any doubt about whether the severe
financial difficulty test was satisfied. In that context, it is
important to apply common sense. Having demonstrated his creativity, I
hope that the hon. Gentleman will withdraw the
amendment.
Mr.
Hoban: I shall withdraw the amendment. I could try to be
more creative, perhaps not limiting it to a sum in excess of £1
million in order to capture all situations.
The
Minister says that the definition of severe financial difficulties is
common sense. She is right; it is fairly apparent. However, I note that
paragraph 6(6) includes the power for the Treasury to specify such
circumstances by regulation. I hope that the Government’s
intention is not to use the power, and note that draft regulations have
not been drawn up. That is understandable; such regulation should be
made on an ad hoc basis. I beg to ask leave to withdraw the
amendment.
Amendment,
by leave,
withdrawn.
Mr.
Hoban: I beg to move amendment 21, in
schedule 9, page 104, line 33, at
end insert— ‘1B
Notwithstanding anything else in this Schedule, in determining whether
two or more companies are members of the same group no account shall be
taken of any interest held by UK Financial Investments
Limited.”’. The
amendment was tabled to elicit clarification. UK Financial Investments
is the holder of the Government’s interests in a number of
financial institutions. The Minister, I am sure, will give us clarity
in that context. The fact that two institutions are held by UKFI should
not create an opportunity for group relief.
Angela
Eagle: Having praised the hon. Gentleman for his
creativity with the last amendment, I am going to disappoint him on his
accuracy with this one. He is wrong to think that UKFI is the holder of
Government shareholdings. It manages the investment, but does not hold
the shares or other securities of any other groups in which the
Government have taken equity stakes. The Government shareholdings are
held by the Treasury through the Treasury Solicitor as nominee and the
need to avoid the tax complications that could have resulted from a
corporate entity holding the shares in otherwise unrelated groups is
one of the reasons why we chose to follow that route when taking the
stakes. So UKFI is
not a shareholder and the need for the amendment simply does not arise.
I hope that, with that information, the hon. Gentleman will agree to
withdraw the
amendment.
Mr.
Hoban: I am grateful for that clarification. It provides
what I was looking for—clarification. It may not have been the
most accurate amendment, but it got the desired result, which I do not
think is a bad thing, Mr.
Hood. I
beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Schedule
9, as amended, agreed
to.
Clause
29Sale
of lessor companies etc: reforms
Question
proposed, That the clause stand part of the
Bill.
Mr.
Hoban: I do not have a huge amount to say on the clause. I
hesitate to tread in the complex area of the tax treatment of leasing
and companies, because it is not a particularly straightforward area.
Clause 29 makes changes to schedule 10 to the Finance Act 2006. There
has, I think, been some consultation with the industry about some of
the unintended consequences of schedule 10 to that
Act.
Schedule 10
was introduced to create an income tax charge on the sale of a company
carrying on the qualifying business of leasing plant and machinery. The
Budget note sets out
that: “Schedule
10 to the Finance Act 2006 prevents a loss of tax when a lessor company
changes hands. It achieves this by calculating a charge and relief
designed to recoup the tax timing advantage gained from a claim to
capital allowances. The legislation ensures that the charge affects the
selling group and the relief benefits the buying
group.” Deloitte
and Touche has said that part of the problem with schedule 10 is that
for leasing
companies—
The
Chairman: Order. I ask the hon. Gentleman not to discuss
schedule 10, because we are coming to schedule 10 in a
moment.
Mr.
Hoban: I apologise, Mr. Hood. I am so keen to
get on and talk about this that I rather overstepped the mark. I
apologise, I should have left that remark to the debate on schedule
10.
Angela
Eagle: The clause introduces schedule 10 to the Bill. It
makes changes to the anti-avoidance rules for the sale of leasehold
legislation contained in schedule 10 to Finance Act 2006,
ensuring that it operates fairly and does not impede commercially
driven transactions. I therefore move that it stands part of the
Bill. Question
put and agreed
to. Clause
29 accordingly ordered to stand part of the
Bill.
Schedule
10Sale
of lessor companies etc:
reforms Question
proposed, That the schedule be the Tenth schedule to the
Bill.
Mr.
Hoban: I return to what I was saying on
schedule 10 and what the problem was—leasing
companies that typically show a period of tax loss at the beginning of
the lease. As tax deductions exceed the taxable rental income and this
timing benefit reverses subsequent periods as the tax deductions reduce
compared to the taxable rental income, selling the company to a
loss-making group before the period of taxable profits begins enables
the future, or deferred tax liability that would otherwise arise, to be
avoided. The consequence was that the legislation was not sufficient to
cover complex transactions involving leasing businesses by companies
who are run in partnerships or consortiums. I understand that the
provisions in schedule 10 now address some of those problems. That is
confirmed by the Budget
note: “Changes
will be made to ensure that companies carrying on a leasing business in
partnership benefit from the full amount of relief due as a consequence
of an increase in their interest in the business and to prevent a
charge being calculated when a partnership is dissolved or ceases to
carry on a leasing business. Where there is an intra-group transfer
involving a lessor company owned by a consortium the measure similarly
prevents the calculation of a
charge.” 7
pm A
number of issues have been raised on this. The initial representations
suggest that the new rules proposed in schedule 10 would make it more
difficult to sell a leasing business to a company with no UK tax
capacity, such as an infrastructure fund or a European trader with no
UK operations. Since the proposals in the Bill might impede parts of
the leasing sector in this country, would it not be better to have some
sort of tax avoidance motive test, rather than the proposals set out in
schedule 10? That might help, encourage the leasing industry
and avoid the suggestion that it would be difficult to sell some
leasing companies to companies with no UK tax
capacity.
Angela
Eagle: The schedule makes changes to schedule
10 of the Finance Act 2006. We have managed to align
schedules—one schedule 10, in the Bill, is replacing another
schedule 10, which is a kind of balance that is rarely achieved in
Finance Bills, but makes things slightly confusing. New schedule 10
replaces old schedule 10 in the same lessor companies
legislation. The
2006 legislation addressed a long-standing pattern of avoidance
involving the sale of a lessor company at a point when the business was
about to become tax- profitable. It has provided valuable Exchequer
protection since it came into effect in 2005; it has been a highly
effective closure of a major tax loophole. However, the
leasing industry has drawn it to our attention that, in exceptional
circumstances, the legislation may be affecting normal commercial
transactions. Where the relief provided for under schedule 10 of the
Finance Act 2006 cannot be used immediately, its value to the buying
group is reduced potentially in feeding in normal commercially
motivated transactions. Part of the difficulty is that a lot of the
companies are run by banks, and banks are not exactly in profit at the
moment. That is where some of the difficulty has arisen. I suspect that
in 2006, when the arrangements were drawn up, the problems that banks
are having now with their profitability were not anticipated. It is
something that has come out of that circumstance. The schedule makes
changes to preserve the value of the schedule 10 relief when not
utilised immediately. At the moment the non-profitability of some of
the companies that are buying or selling is an issue that has adversely
affected activity in this particular
market. The
schedule also removes anomalies affecting the treatment of leasing
businesses carried on by companies in partnership and by companies
owned by consortiums, ensuring that the legislation operates fairly in
all circumstances. The hon. Gentleman recognised that in his remarks.
Proposals for change to deal with the issue were presented in a
discussion document published in July 2008. Draft legislation was
published for comment with the
Budget. The
hon. Gentleman raised the difficulties of selling to infrastructure
funds. The Bill has no effect on the sale to infrastructure funds. The
issue was known about last year. I can tell him that we are in
discussions with the industry about how we can deal with the issue, so
it is not dealt with in the Bill, but we are aware of it and are
discussing it. I hope that he will acknowledge that the changes in
schedule 10 work for the benefit of the industry in trying to maintain
an important market through these difficult times. Clearly, we shall
also apply such an approach to our review relating to the sale to
infrastructure funds in order to give the assistance that is
appropriate for that particular and important market. I hope that, with
that reassurance, the Committee will agree to make schedule 10 part of
the
Bill. Question
put and agreed
to. Schedule
10 accordingly agreed
to. Ordered,
That further consideration be now
adjourned.—(Mr.
Blizzard.) 7.5
pm Adjourned
till Tuesday 9 June at half-past Ten
o’clock.
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