Clause 27
Finance (No. 2) Bill
11:00 am
John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)
The clause introduces schedule 1 and together, they provide for a small extension to the group loss relief rules for companies, which will allow UK groups to claim corporation tax relief for foreign losses in some very limited circumstances. I put it on the record so that it is clear that existing group relief rules for UK losses, which business is understandably keen to retain, are unaffected by the proposal.
The Government are introducing this small extension to group relief following the decision last December by the European Court of Justice in the case of Marks & Spencer v. Halsey. In that case, the court ruled that the UK’s group loss relief rules are in principle compatible with European law, but they go too far in denying relief for foreign losses in some narrowly defined circumstances: where a UK parent company can show that a foreign subsidiary has exhausted all possibilities of relief in its state of residence.
With effect from 1 April this year, our domestic tax legislation will be changed by the clause to reflect the decision taken by the European Court of Justice, making it clear that relief will be available in some limited circumstances to a UK parent company and its UK subsidiaries for the tax loss of a foreign subsidiary. That foreign subsidiary must either be resident in the European economic area or have made the loss in a permanent establishment based in the European economic area.
Schedule 1 sets out new conditions and rules. To ensure that they are observed the UK claimant company will be responsible for showing that all the conditions for the new relief are met. That is necessary because losses surrendered under the new rules will be from foreign companies that are not generally subject to UK law. Although the relief will be available only in the narrow circumstances set out in the schedule, the Government became aware that some people were planning arrangements with the aim of obtaining relief in the UK where it would not otherwise have been available. My right hon. Friend the Paymaster General announced on 20 February that relief in the UK would be denied where such arrangements are made. The schedule contains provisions that will give effect to the announcement from that date.
Mr. Benton, you are encouraging us to debate new clause 7 at the same time as clause and schedule stand part, so perhaps I may take briefly the opportunity to deal with it. It is interesting that it was tabled by the hon. Member for South-West Hertfordshire (Mr. Gauke), rather than his party’s Front Bench spokesmen, and it will be interesting to see what they do if he presses it to a vote.
This is an extraordinary new clause; it could have been drafted by the European People’s party in the European Parliament—perhaps it was. Its intention is clearly to pretend that the European Union does not exist and, therefore, has no impact on the UK tax system. I explained earlier why, in our view, clause 27 and schedule 1 are necessary and reasonable. Just as importantly, we cannot renege on our treaty commitments in the way that the new clause encourages and suggests that we do; it is impossible for us to do that. Simply seeking to say that existing legislation applies notwithstanding the European Communities Act 1972, does not set aside those commitments, even though the hon. Gentleman may wish to do that.
On the important central point, it is right—it is the Government’s clear policy—that member states should have the power to determine the shape of their own tax systems. Other treaty provisions make it clear that that competence is preserved. We are not endangering that power to determine our own tax policy by introducing the clause and the schedule; we are simply aligning our law with the latest developments in European Union jurisprudence in an area specifically related to the internal market.
In conclusion, clause 27 and schedule 1 make provision for a small extension to the group relief legislation, to make it clear how relief from foreign losses will be available in certain narrow circumstances, and enable us to preserve existing group relief for UK losses. I commend the clause to the Committee.