Schedule 8 - Loan relationships: miscellaneous amendments
Finance Bill
9:30 am
Ms Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)
Good morning, Sir John.
I shall respond to the amendments tabled by the hon. Member for Arundel and South Downs (Mr. Flight) by putting into context schedule 8, which makes changes to legislation on loan relationships and derivative contracts that have been identified in the post-implementation consultative group, of which the hon. Gentleman is aware. It deals with some loopholes that have emerged since 2002, covers areas such as the treatment of certain venture capital limited partnerships by relaxing further an anti-avoidance rule that had an unintended effect on those partnerships, and deals with companies in insolvency proceedings by extending the circumstances in which they can avoid being taxed on imaginary profits. It also covers companies that emigrate or move assets from a permanent establishment by ensuring that tax is charged on profits accruing up to the date of the move, and covers the major interest test for
deciding if companies are connected and so receive special tax treatment. As the hon. Gentleman said, this is a highly complex area of tax law.
It is the Government's view that, together, amendments Nos. 53 and 54 create an unjustifiable new category of loans that can be exempted from the late interest anti-avoidance rules. The late interest rules prevent a tax deduction for interest that has not been paid within 12 months of the end of the accounting period, and they apply where the lender and borrower are connected or under common control.
Amendments Nos. 53 and 54 add a completely new category of venture category funds whose loans would be exempt from the late interest rule. That new category covers limited partnerships funds, where the late interest rule applies because the general partner is the only partner who can manage the partnership. By excluding loans from those funds from the late interest rules, the amendments seek to disregard the central role of the general partner.
The Government are proposing changes that do no more than put beyond doubt the circumstances in which the late interest rules are set aside for loans made under limited partnership venture capital funds. One change makes sure that the existing exemption covers some of the foreign partnerships that the industry argued are otherwise excluded because they have some corporate characteristics. The other change stops some loans made by venture capital funds from coming under the late interest rules as a result of an individual being a partner in the fund. We consider that those changes go as far as is needed to address the difficult areas of foreign legal concepts, and cases where individuals are partners in such funds. As the hon. Gentleman said, the changes have been welcomed by the industry.
I recognise the point that the hon. Gentleman and the industry have been trying to make, but I am trying to explain the difficulties to the Committee. The amendments represent a significant step beyond the clarification of the existing exemptions from the late interest rules that is proposed by the Government. They go to the heart of the concept of control, which is used widely in the Taxes Act 1988 as a trigger for anti-avoidance rules. I am not minded to take this step because of the risk of weakening the rules; to do so would carry significant and unjustifiable risks for the Exchequer. I entirely accept that it is a complex area, but as a Minister I am clearly making the judgment on advice from my officials. Although we listen carefully to what the venture capital industry is saying, we cannot allow the breach of wider rules.