John Butterfill (Bournemouth West, Conservative)

I remind the Committee that with this we are discussing the following amendments:No. 107, 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, 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, page 60 [Vol I], leave out lines 25 to 28.

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

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

Good afternoon, Sir John, and welcome to this afternoon’s sitting. When we broke for lunch, I was responding to amendments Nos. 106 to 110, which were tabled by the hon. Member for Wycombe (Mr. Goodman). His points on amendment No. 107 related to section 176 of the Taxation of Chargeable Gains Act 1992, which covers some of the same ground as clause 69 in that it could be used to combat avoidance involving the artificial creation of losses. Section 176’s remit, however, is wider than just avoidance.

Section 176 covers purely commercial situations that would otherwise produce an unfair result for tax purposes. For example, if a company pays a distribution out of pre-acquisition profits prior to being sold, section 176 ensures that the correct amount of capital loss is recognised on the sale. To pay the dividend might well be a normal commercial judgment, but it is still appropriate to apply  section 176. It has no purposive anti-avoidance test; rather, it is an objective test that is well understood and respected.

Like amendment No. 107, amendment No. 108 has nothing to do with the rest of the clause but touches on something else. It does not touch on the targeted anti-avoidance rules, but would remove a rule that applies only to life insurance companies with holdings in unit trusts and open-ended investment companies. Because they are charged tax on movements in the value of such holdings and not just on disposals, there is a unique relieving rule that allows them to carry back losses to the two previous periods. No other type of company is allowed to carry back capital losses. When an insurance company changes group, the current law prevents carry-back except where the losses arose on the assets that the company held before joining the new group. That is in line with the general thrust of the loss and gain buying rules.

The Bill will update legislative references and provide a minor relaxation of the restrictions on carry-back of losses. I am not sure what prompted amendment No. 108. The hon. Member for Wycombe said that it was probing and not directly relevant. On that basis, I do not accept it. However, because the point that he raises could none the less be advanced, I shall say to him that Her Majesty’s Revenue and Customs has recently issued a consultation document on taxation of life insurance companies. That is the right place to raise such issues regarding future intentions. I do not think that his point is necessarily relevant here.

Amendment No. 110 is strange. It would remove a transitional rule included in the Bill as a result of representations from companies and their advisers. It is strange to want to remove that. Subsections (9) and (10) are intended to provide additional relief for companies that have undertaken certain transactions prior to the pre-Budget report that do not involve gain or loss buying but that could have been subject to restrictions on their use of capital losses. They have been included because companies asked that the draft legislation include improved targeting in that specific area. The Government recognised that the original draft could be improved and responded accordingly. I cannot see any good reason why the amendment should stand, although I hope that the hon. Gentleman will accept my explanation. In effect, amendmentNo. 109 would remove from the scope of the clause any tax-driven purchase of a company that occurred before the pre-Budget report. If we were to accept that amendment, the subsection that it would remove would be unnecessary. However, as I do not believe that the amendment would have that effect, amendmentNo. 110 should also be rejected.

I hope the hon. Gentleman will accept those explanations of how the clause works and why this large group of amendments would not be necessary.

Stewart Hosie (Spokesperson (Chancellor of the Exchequer; Home Secretary); Dundee East, Scottish National Party)

I have listened carefully to the Paymaster General. Throughout her speech, she made continual reference to the fact that the provision is designed to tackle specific tax avoidance measures and schemes. However, as yet, I am not wholly convinced of that. She has said repeatedly that there was an HMRC informal procedure in which schemes, deals or trades could be checked to determine  whether they were legal when companies were buying losses or whether they would fall foul of the provision. That runs the risk, I think, of companies being in a de facto starting position for almost every significant commercial transaction.

When a company may acquire another that has losses, the starting point will be to go to the HMRC to determine whether it will be a legitimate commercial transaction or whether it will fall foul of the new rules. That will run the risk of adding time delays, additional cost and uncertainty to the process of acquisition. That is important.

We should look at the various forms of purchase and the reasons for them in relation to amendment No.106. Companies may buy to extend their market share; as part of a pre-agreed growth strategy; to extend their geographic reach; to extend the development and production of sales capacity; or to gain new technology, expertise or skills. They may buy as part of a self-financed growth strategy or as part of planned use of investment cash from elsewhere—for example, from investors or one of the markets. They may buy or, indeed sell, as part of a takeover defence strategy or to position themselves after a disposal to take over another company. They may do so to avoid breaching monopoly and other fair trade rules. Companies may buy or sell to maximise shareholder value and fulfil their fiduciary duty. They may buy simply to diversify to protect themselves in the case of a business that had been too narrowly focused for the time being. They may also sell loss-making parts of the business to shore up the remainder or as part of a strategy to focus on core activity. They may sell in order to invest elsewhere.

Those companies that buy particularly to extend their geographic reach or increase turnover may well find that the best value they can achieve is to buy what are, at the moment, loss-making concerns. A judgment might be that the savings could, in the future, be made centrally through enhanced purchasing muscle and so on and so forth. They may feel that the name of the company and the reputation of its brand could turn what was a loss-making purchased company into a profit-making arm. All those decisions are legitimate and valid.

My worry is that the changes will add uncertainty, delay and cost to what should be a normal commercial transaction. I will concentrate on the consequences of the delay and uncertainty. They could be huge. If a company were unable to buy a loss-making concern, to put on muscle or perhaps reduce its value as a takeover defence mechanism and if it had to go to the HMRC to identify in advance if that was a legitimate transaction, it could be extremely worrying. Companies that sell may find that there is no longer a market there if they are trying to divest themselves of a loss-making arm. If there is a delay in doing that and if the cash is not brought in quickly, they may end up carrying costs that they did not anticipate, which may put the rest of the business at risk.

I recognise the Paymaster General’s earlier concerns, and amendment No. 106 seems to suggest that if companies purchased a loss in any of the ways I cited and part of the transaction was defined by the HMRC as legitimate, they could mask a purchase of the loss for the purpose of tax avoidance, which she referred to earlier. I am not convinced that I would vote for the  amendment if it were pressed to a vote, but I would like her to address these legitimate concerns. If we are not satisfied today, we may have to return to clause 70 and related clauses at a later stage.

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

To help the hon. Gentleman, we are dealing with a series of clauses: clauses 69, 70 and 71. I referred to the informal clearance procedure when we discussed amendments Nos. 105 and 101. Those were grouped under clause 69, but amendment No. 101 is relevant. It is the same type of amendment becauseit would include a statutory clearance procedure in clause 71. It was included in that group because all the amendments dealt with the same subject matter.

I agree absolutely with the hon. Gentleman’s general points, which I also made, on why a statutory clearance procedure was not desirable for the reasons he gave. Such a procedure was unsuitable for clause 69 because that clause is specific, clear and targeted, and it is accepted as such. The informal procedure I referred to in response to amendment No. 101 relates to clause 71. I went on to say that despite the fact that it was an anti-avoidance measure, it was far more complex than that. Additional points were necessary, which is why I raised the informal clearance procedure, the guidance and other supports that the HMRC would put in place for companies that sought that certainty. I concur with the hon. Gentleman regarding the undesirability of statutory clearance requirements in these clauses.

The hon. Gentleman’s second point relates to clause 70, which introduces new provisions to deal with capital losses and capital gain buying. Again, it only applies when the main purpose—or one of the main purposes—of the arrangements in place was obtaining a tax advantage. Before the Committee started, you and I reflected on this matter, Sir John, and on the existing legislation that already dealt with it, so it is not a new subject or an exclusion that companies might not be aware of—they are aware of it. The legislation was designed to stop companies exploiting losses in the ways that we have discussed.

Unfortunately, ways have been found around the legislation, which has been in place for quite a long time. It pre-dates this Government. Clause 70 will repeal the old bits of the legislation—the gain buying rules that have been repealed—and includes the anti-avoidance measures. It leaves the old loss-buying rules, because they still have a purpose. That was the point of the exchange between myself and the hon. Member for Wycombe about the amendments that he tabled.

All the fears that the hon. Member for Dundee, East (Stewart Hosie) suggested would not apply at this point. There is not an informal clearance requirement and the clause is straightforward. Therefore, I can confidently reassure him that some of his examples would not occur. I hope that that clarifies things, because the three clauses interact.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

It is good to see you in the Chair, Sir John. If I may interact withthe Paymaster General about her response to the amendments as follows—

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

How interesting.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

I am gratified that the Paymaster General says it is interesting, because I was not convinced that she would necessarily think that was the case—[Interruption.] At last, a Government Back Bencher is paying even closer attention to the detail of the Committee’s procedure than they have to date. They will turn with interest to what the Paymaster General said about amendment No. 108. What she said about a consultation in relation to the point that I raised about life assurance was welcome, because it was put to me that the rule changes could hurt policyholders and deter life assurance companies from commercial mergers. If we are talking about life, that issue will be relevant to the consultation.

On amendment No. 106, where we have a stab at writing into law a definition of what the “main purpose” of a company is when that main purpose is to avoid paying tax, the Paymaster General made the point that the definition would be a narrow one. I accept that, so I beg to ask leave to withdraw the amendment.