Clause 70
Finance (No.2) Bill
12:45 pm
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.