Clause 34 - Payments of excessive interest etc
Finance Bill
4:00 pm
Mr Mark Prisk (Shadow Minister, Economic Affairs; Hertford and Stortford, Conservative)
I beg to move amendment No. 12, in
clause 34, page 35, line 29, at end insert—
'(fa) in sub-paragraph (4)(c) after ''would apart from section 84A(2) to (10) of this Act'' insert ''and disregarding any adjustment which might otherwise arise under the provisions of this paragraph''.'.
This is a probing amendment to deal with an anomaly concerning intra-group loans. It was tabled with the support of both the Law Society and the Chartered Institute of Taxation. The effect of subsection (4), which is an integral part of the clause, is that, when an intra-group loan is made on an interest-free basis, no exchange gains or losses will be disregarded on the debtor or creditor loan relationship. In many people's opinion, that does not go far enough, because it does not deal with cases in which an intra-group loan is advanced on interest-bearing terms to enable the borrower to obtain the benefit of matching treatment.
When the loan is treated as matched in such circumstances, there is nothing to prevent all or some of the exchange gains or losses from being ignored for tax purposes. Paragraph 11A(4)(c) and (5)(c) of schedule 9 to the Finance Act 1996 currently provides that no adjustment would arise on the exchange gains or losses when—this is the important point—there is a corresponding debt loan relationship and exchanged gains and losses are taken into account.
In plain English, the problem arises when the borrowing exceeds the amount that the borrower could have borrowed if it were dealing at arm's length and the loan were interest bearing. In those cases, but for matching treatment, an adjustment would arise on the borrower by virtue of the amended provisions in paragraph 11A(4)(c) and (5)(c). There is nothing to prevent an adjustment from arising under that paragraph. The danger is that that would leave the lender of the intra-group loan exposed to tax on, for example, exchange movements when it borrows in a foreign currency and on-lends an equivalent amount in foreign currency to a thinly capitalised UK subsidiary in order to finance the acquisition of that subsidiary.
The amendment is designed to draw from the Paymaster General the reasoning behind the
Government's decision and to deal with the anomaly that I have tried to explain. It is a complex issue and relates to different parts of legislation. It matters simply because many UK companies are increasingly and regularly investing overseas. The purpose of the amendment is to remove the anomaly that could prove to be a barrier to that. I hope that the Paymaster General can enlighten us on the thinking that the Government have applied to the measure.