Clause 31 - Exemptions for dormant companies and
Finance Bill
2:45 pm
Mr Mark Prisk (Shadow Minister, Economic Affairs; Hertford and Stortford, Conservative)
This is my first speech this afternoon and I am pleased to welcome you to the Chair, Sir John. I am sure that you will continue to guide us and keep us on the straight and narrow.
The clause seeks to provide a range of exemptions for dormant companies and small and medium-sized enterprises in the context of transfer pricing. The amendments are probing.
The purpose of amendment No. 9 is to extend the exemption for dormant companies to include those that become dormant after 1 April this year. A company is dormant and, therefore, exempt from the requirement to prepare a report and accounts during any period for which it has no significant accounting transaction. The imposition on such enterprises of the proposed transfer pricing adjustments for UK companies would give rise to accounting transactions that would cause many currently dormant companies to lose that status. The effect would be to require UK groups to prepare a report and accounts for those companies.
The Government have sought to address the issue by providing an exemption from the transfer pricing rules for companies that were dormant prior to the commencement of the new regime. The current
exemption will not extend to companies that become dormant after 1 April 2004. Many companies cannot be liquidated, whether for tax, name protection or other reasons, and unless the exemption is extended those companies could be brought within the regime and be required to prepare a report and accounts under existing company law rules.
I appreciate that the Inland Revenue's concern is that dormant companies might—I emphasise ''might''—be used as a conduit for transactions that might otherwise be caught by the rules and that that might be inappropriate in some circumstances. Many people believe and have argued—I understand this, although I am no tax expert in this context—that there could be a reserve power to bring such companies within the scope of the rules in tax avoidance cases. I would be grateful if the Minister commented on that because that might solve the problem that has been identified.
Under amendment No. 10, companies that are in insolvent liquidation, administrative receivership or administration would be excluded from the rules. Many people believe that such companies should be excluded and that the obligation to prepare the documentation should be removed for a number of reasons. First, in most cases, those companies will be part of a group and their debtors will also be insolvent and, therefore, unable to make adjustments to, or, for that matter, even to repay, debt that is outstanding at the date on which the process begins. Secondly, an insolvent company is limited by insolvency law in the transactions that it can enter into, and that is relevant. The arm's-length principle at the heart of the transfer pricing mechanism cannot be readily applied in those circumstances. Thirdly, there is a danger that the cost of compliance will fall on creditors, who in such circumstances will already have suffered considerable losses. The idea behind the amendment is to establish the Government's response to the argument that insolvent companies should be exempt.
I hope that with those explanations we can look forward to a positive response from the Minister.