Helen Goodman (Bishop Auckland, Labour)

I beg to move amendment No. 106, in page 57, line 10 [Vol I], at end insert—

‘184DA Sections 8, 184A and 184B: meaning of “main purpose”

For the purposes of sections 8, 184A and 184B “main purpose” means a purpose without which the underlying commercial transaction would not have occurred.'.

Edward O'Hara (Knowsley South, Labour)

With this it will be convenient to discuss the following amendments: No. 107, in page 60, line 4 [Vol I], at end insert—

‘(4A) At the end of section 176, add—

“(10) This section shall not apply to companies for disposals accruing after 5th December 2005.”'.

No. 108, in page 60, line 6 [Vol I], leave out from ‘212)' to end of line 13 and add

‘subsections (8H) and (8I) shall cease to have effect.'.

No. 109, in page 60 [Vol I], leave out lines 25 to 28.

No. 110, in page 60, line 29 [Vol I], leave out from beginning to end of line 2 on page 61.

Helen Goodman (Bishop Auckland, Labour)

The clause bundles together a series of anti-avoidance proposals in order to amend the Taxation and Chargeable Gains Act 1992. Before I go through  the amendments in detail, I want to return to the point about the clarity of the legislation. In the debate on the amendments to clause 69, I quoted Deloitte’s general welcome for the provision. However, it is worth noting that the firm Norton Rose recognises greater ambiguity and difficulty for business in these arrangements than the Paymaster General allows. It said:

“The guidance notes state that the provisions do not apply where there is a genuine commercial transaction that gives rise to a real commercial loss as a result of a real commercial disposal. However, debate is likely to continue as to the meaning of these phrases. HMRC have rejected calls for a clearance procedure and have also rejected requests for mitigation of this rule in circumstances where companies seek to recognise capital losses on assets before a real commercial disposal takes place."

The context of amendment No. 106 is that proposed new section 184A in clause 70 will place restrictions on companies buying other companies with losses. New section 184B will place restrictions on companies buying other companies with gains. The crucial section, which relates to the previous two, is new section 184D which defines "tax advantage" in relation to the other sections.

Amendment No. 106 is a probing amendment, which would insert a new section 184DA in order to place in law a definition of the main purpose of a company when that main purpose is to avoid paying tax. There is currently no interpretation of main purpose within UK tax statute. The definition in the amendment is a case-law definition given as obiter dicta. In case any members of the Committee do not know what that is, I looked it up, although not through the medium ofMrs. Gauke, and found that obiter dicta are the remarks of a judge which are not necessary to reaching a decision, but are made as comments, illustrations or thoughts. The hon. Member for Wolverhampton, South-West knew that already, but other Committee members did not necessarily know. Some of them might have.

Amendment No. 107 deals with sections 176 and 177 of the 1992 Act, which disallow capital losses where there is tax planning to generate an unreasonable loss. Following the changes to section 8 of the 1992 Act approved in clause 69, there is arguably no reason for section 177 to remain in existence for corporate bodies. The amendment seeks to establish whether the Treasury intends to duplicate a piece of legislation unnecessarily.

Amendment No. 108 would remove the whole of clause 70(5)(a) and (b). The argument supporting it relates again to the unnecessary duplication of legislation and runs as follows. The measures relate to life assurance businesses. Specific rules prevent life assurance companies from deferring capital gains on their holdings of equities by holding them via a captive collective investment vehicle such as a unit trust. The rules work by deeming the assurance company to have sold all such unit trusts at the end of each accounting period. The net amount of capital gains or allowable losses arising from the total deemed disposals is spread for tax purposes over seven accounting periods, including the current one. Typically, a net loss can be carried back against spread gains arising in the previous six periods.

Subsections (8A) to (8I) of section 213 of the 1992 Act were introduced to deal with an anomaly. Capital gains and losses are particular to the company in which they arise. Therefore, if life assurance business was  transferred to a new company, provisions allowed net spread amounts not yet taxed to transfer with the business. However, if the stock market then plummeted, the transferee could not carry back the losses against gains already taxed to the transferor, even though the gains and losses arose to the same policyholders.

Subsections (8A) to (8I) of section 213 were introduced to allow a two-year carry-back by election where the transferor and transferee were in the same group. Unfortunately, in the opinion of some, subsections (8H) and (8I) were included so that the election could be reduced by the effect of the pre-entry gain rules. It was argued that that was unnecessary, as the rules required that the transferee did not carry on long-term business before the transfer. Hence, gains and losses must relate to the same policyholders.

Clause 70 seeks to introduce a new restriction following the abolition of the pre-entry gain rules. General anti-avoidance rules now apply to the creation of capital losses, and specific anti-avoidance rules apply to the purchase and sale of companies for their capital losses or gains. Also, rules exist to prevent shareholders from using their losses against policyholder gains and vice versa. It is argued that given those measures, there is no need for subsections (8A) to (8I) to remain in force.

Amendments Nos. 109 and 110 propose to delete everything between line 25 of page 60 to the end of line 1 of page 61. It is argued that the measures that would be deleted are retrospective, and that UK tax law should not usually be retrospective. I look forward to the Paymaster General’s response on those points.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

As with the measures in clause 69 that we discussed, this clause will apply only to companies that enter into arrangements with one of the main purposes being to obtain a tax advantage. It will provide protection against the practice of buying and selling companies not for their inherent business worth or for access to their assets but for access to their tax potential. It also introduces new rules to tackle tax avoidance and repeals the original gain buying rules.

There has been increasing evidence in recent years of tax avoidance involving capital losses and capital gain buying, as a number of groups of companies have accumulated large amounts of capital losses—more than they need to set against their gains. Some of those groups have been seeking ways to create a value for those losses. The clause will prevent companies from benefiting from the losses of other companies or groups when entering into an arrangement one of the main purposes of which is to obtain a tax advantage. If the conditions set out are met, the use of losses will be restricted so that the company or group is stopped from setting off another group’s losses against its own gains.

Amendment No. 106 defines in fairly narrow terms what arrangements should be regarded as having a “main purpose” of avoiding tax. There are many examples of the main purpose test in UK tax avoidance legislation, and by necessity the matter can be determined only on a case-by-case basis with reference to the facts and circumstances of the taxpayer concerned. The test is well used, and HMRC has issued detailed guidance, which it continues to update, to provide as much certainty as possible to business. The system is working. The main purpose test is included  not only in clauses 69 to 71 but in a lot of other places. The phrase is well understood by business and its advisers, and guidance and support is given by HMRC.

The definition in the amendment is much narrower than the natural meaning of “main purpose” or “one of the main purposes”. The amendment would mean that no transaction with a commercial purpose could form part of a tax avoidance arrangement, however minor or irrelevant it was to that arrangement. Unless the tax advantage was the only purpose of the transaction, the rules could therefore not take effect. Planners would simply ensure that some connection was made, however tiny. The amendment would severely weaken the clause and mean that companies could easily undermine the application of the rules.

On amendment No. 107, I cannot quite see the link between clause 70 and section 176 of the 1992 Act. The latter deals with the calculation of capital gains and losses on the sale of company shares when sales or transfers of assets under value have reduced the value of the company: that is called a depreciatory transaction. The hon. Gentleman wants to repeal section 176, which covers some common ground with, for example, clause 69. It can be used to combat avoidance involving the artificial creation of losses. Its remit, however, is wider than just anti-avoidance.