Schedule 8 - Loan relationships: miscellaneous amendments
Finance Bill
9:30 am
Mr Howard Flight (Shadow Chief Secretary To the Treasury, Economic Affairs; Arundel and South Downs, Conservative)
Our amendments and the next two cover crucial issues under the schedule. With your permission, Sir John, I shall include in my comments on these amendments any minor comment that I might have made in a debate on the whole schedule.
The amendments to the bad debt relief rules for debts between companies that were connected but became unconnected as a result of insolvency proceedings are the third part of the territory covered by the schedule. If companies are connected, the bad debt write-off is non-deductible on one side and non-taxable on the other. However, that is not the case when companies are unconnected. There is a gap in the existing rules that means that it is possible for a one-sided tax effect to arise because of a lack of clarity on which arrangements left companies unconnected. Schedule 8 clarifies in detail the rules governing connection. We have no perceived problem with the rules. Indeed, because they clarify the conditions under which release of a debt can be made without a taxable credit arising on the debtor in certain insolvency proceedings, we view them as helpful.
Amendments Nos. 53 to 55 relate to the late interest rules, which are highly technical. The Government's changes are split into two parts. According to the boasts of the Inland Revenue briefing note, the first makes changes to put beyond doubt a point of concern for the venture capital industry. Many believe that the Government's proposals in paragraph 2 will not achieve the desired objective in relation to investments by private equity funds that are not collective investment schemes. They are bodies corporate even though they are limited partnerships.
The point of concern revolves around whether companies owned by private equity partnerships could deduct interest on their loans from those partnerships on an accruals basis, even if the interest were rolled up or not paid within 12 months from the end of the accounting period, and arose because the rule affects interest paid by a close company.
Most private equity investments are treated as close companies, because each private equity investor must attribute all the partnership interest to itself to work it out. The Bill introduces a measure that exempts a partnership from the need to attribute interest, which the industry greatly welcomes, but concern remains that the general partner of the private equity partnership could still make the partnership close because of the control that it exercises on behalf of the other partners. Amendments Nos. 52 and 53 would extend the definition of the collective investment scheme-based close company to cover that point.
Another concern relates to the same provisions. Customarily, private equity groups used a two-tier structure, which ensured that private equity investment could deduct interest on an accruals basis. Following the Finance Act 2003, the view was that that was no longer effective unless the creditor was a collective investment scheme, as defined in the Financial Services and Markets Act 2000. That carve-out has been helpfully supplemented by the Bill, with another small exception.
The Government's proposed exemptions may remove the CIS-based companies when the creditor is a participator, but they do not seem to do that when the creditor has control of the company or a major interest in it. I am told that there is a common circumstance in which a general partner receives a substantial amount of the income from investments in periods during which there is no capital realisation and when the partner could be deemed to control, or have a major interest in the investment. We therefore propose that the exemption for CIS limited partnerships should be extended to situations in which the partnership controls the major interest, and not only where it is a participator. Amendment No. 55 seeks to address that issue.