Clause 31 - Exemptions for dormant companies and
Finance Bill
2:45 pm
Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
In the consultation before the Budget, we received many representations that a consequence of extending the transfer pricing rules to domestic transactions would be to cause many companies to cease to be dormant. As the hon. Gentlemen pointed out, that would cause significant administrative costs.
The Government are sympathetic to the representations, but there are two important constraints on what we can do. First, we must ensure that we do not create uncertainty under European law. We cannot treat dormant companies with a foreign parent less favourably than dormant companies with a UK parent. Secondly, we must ensure that we do not create an opportunity for dormant companies to be used as a conduit for extracting profits from the UK without paying tax. That is by far the greater danger to the corporate tax base, in that it would be possible for a group to transfer income-generating assets to a company and then allow that company to become dormant. Such planning cannot be done if the exemption is limited to companies that are dormant at 1 April 2004. I am sure that neither hon. Gentleman needs to engage in a leap of the imagination to understand that the opportunity to create dormant companies at any time would also create the opportunity to extract profits from the UK without paying tax in the UK.