Clause 38 - Expenses of management:
Finance Bill
5:00 pm
Mr Mark Prisk (Shadow Minister, Economic Affairs; Hertford and Stortford, Conservative)
I beg to move amendment No. 58, in
clause 38, page 42, leave out lines 15 to 19.
We now move on to the question of management expenses, which is not quite as it sounds. Those members of the Committee who, perhaps, were hoping that this might be something more personal may be disappointed.
Generally, we welcome the new ''expense of management'' rules, as we might reasonably call them. The amendment relates to what we consider to be the one retrograde step in the clause. I hope, Sir John, to catch your eye in the stand part debate, so that I can examine the broader issue.
The amendment relates to subsection (1), which provides that expenditure of a capital nature generally does not count as management expenses. For a long time there has been a fairly grey area in relation to management and expenses, but there has always been quite a clear set of rules governing capital and revenue, particularly in terms of trading expenses.
At one extreme, there are the day-to-day expenses of managing investments, which are clearly allowable, both under the old and the new rules. At the other extreme are the costs directly associated with the sale or purchase of a capital investment, which have been commonly accepted as capital, and for which relief is potentially available under the capital gains rule. In
between those two extremes are the costs incurred in considering investment strategy or deciding which investments to buy and sell. The treatment of that activity becomes crucial when a transaction falls through, and particularly when it produces abortive, and often substantial, transaction costs. Under new section 75(3), such costs would be capital and no tax relief would be available for them. In other words they would be—this will be of particular interest to those who follow tax matters closely—a tax ''nothing''.
From reading the clause, and from a cursory glance at the Revenue's draft ''Guidance for Management Expenses'', it appears that the Government's line is that despite the absence of specific capital exclusion in the old rules, the view has always been that such costs were not management expenses so no relief was available. I hope that the Minister will confirm that that is the view of the Revenue and the Government and, if not, that she will explain the provision.
If that is the Government's view, most independent experts in the field would regard it as directly undermining a long-held distinction in which all costs of managing investments are allowable, but those incurred in acquiring an investment are not. There should not be a middle ground.
I shall refer briefly to the representations made by the CBI regarding this matter. It stated:
''There is widespread concern over the proposed blanket disallowance of expenditure of a capital nature, which CBI members believe is both unnecessary and inappropriate, given the very different features of trades and investment businesses.''
The issue has reached the courts, notably in the case of Camas plc v. Atkinson in 2003, which involved the substantial costs of evaluating a projected acquisition that did not proceed. The Revenue lost the case in the High Court in July 2003, and I understand that the decision was upheld in the Court of Appeal in April this year.
The Minister will realise, and I hope that she will comment on the matter, that the independent view of the vast majority of experts is that the loss of the case provoked the introduction of new section 75(3). That is why they dispute—they have good reason for doing so—the Revenue's assertion that the provision is reinstating a long-held and generally accepted view of the law. They genuinely believe, and the evidence seems to support their belief, that the case was reaffirmed only two or three weeks ago and that is the reason for the clause.
The purpose of the amendment is to try to remove what is generally perceived as being a retrograde step in what is otherwise a generally welcome reform. I hope that the Minister will reflect carefully on the points that I have raised on behalf of those who are directly affected by the legislation.