Clause 51 - Use of different accounting practices
Finance Bill
10:15 am
Mr Howard Flight (Shadow Chief Secretary To the Treasury, Economic Affairs; Arundel and South Downs, Conservative)
Hon. Members have raised one or two technical issues. Once international accounting standards—IAS—are in force, companies will be required to prepare consolidated accounts, and hence the accounts of the holding company, under IAS. However, they may choose to continue to prepare UK generally accepted accounting practice—GAAP—accounts for some or all subsidiaries. They may well choose to do that for non-tax reasons, such as the level of work involved.
The clause is broadly welcomed by business. It is seen as the inevitable price of allowing companies a free choice to use GAAP at solo company level—a sort of burden on business. The clause applies a mechanical test to determine whether a transaction between two companies that use different accounting practices should be adjusted for tax purposes. I believe that the Revenue has already been asked to explain why the test should not be whether there are genuine commercial reasons for the adoption of different accounting practices.
The clause is a necessary response to the decision to allow companies the choice to use GAAP at a solo level, but it has been pointed out that it could have been better drafted. Where it applies, it forces a company using IAS back on to UK GAAP for tax purposes if a tax advantage would otherwise be obtained. There is no motive test, so the taxpayer gets the worst of both worlds. For example, suppose that two group companies undertake a derivative transaction and accruals are accounted by one company under UK GAAP, but marked to market by the other under IAS. If the difference produces a tax disadvantage, it stands, but if it produces an advantage, it is cancelled by forcing the second company on to UK GAAP.
It has been argued that that aspect could be removed by introducing a test that the advantage had to be one of the main foreseeable benefits when the transaction was implemented. That is what we seek to do with the amendments.
The point has also been made that, although what I have just described is unfair on the innocent, the measures are potentially weak against a determined avoider, as they apply only between two companies in the same capital gains tax group. They could be de-grouped quite easily while remaining under the same effective ownership and control. The arrangement leaves out an intra-IAS arbitrage opportunity deriving from clause 50(3) and applies only to transactions or series of transactions, not to companies with different existing profiles, which can be used as the basis for arbitrage.