Clause 46
Finance Bill
5:00 pm
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
Clause 46 introduces schedules 13 and 14. Schedule 13 constitutes a comprehensive new regime for the charge to corporation tax of sale and repurchase transactions entered into by companies. Those transactions are widely known as repos.
Schedule 14 contains a number of consequential amendments to other provisions of the Income and Corporation Taxes Act 1988 made necessary by the repeal of the existing provisions for taxing repos and their replacement by the rules in schedule 13.
The three Government amendments make a minor modification to schedule 13. They correct a defect that might have led to loss of tax. The new rules for charging sales and repurchase agreements to corporation tax provide that where a company sells securities under a repo, it is to be taxed on income arising on the securities as if the sale had not taken place. That is subject to the requirement that the company must recognise the income in its accounts during the period of the repo.
That requirement may result in income falling out of the charge to tax in which the borrower is taxed on a receipts basis in respect of income arising on the securities. For accounts purposes, it recognises that income before entering into the repo. In that case, it will not recognise the income again during the repo. If the amendments were not made, the income could not be charged to tax. The amendments, therefore, omit the requirement that recognition of the income for accounts purposes must take place in the same period in which the arrangement is in force. That ensures that companies remain taxable on the income, provided that that is reflected in their accounts.
The amendments allow us to move forward with schedules 13 and 14. Repos are widely used in the financial markets as a form of secured loan. They involve the sale by a person of securities—shares or debentures—under an agreement that those will subsequently be repurchased at an agreed date at a price agreed at the outset. The sale of the securities realises cash that is economically equivalent to a loan that is repaid with interest, in the form of an increased repurchase price, when the securities are bought back.
As hon. Members know, at the time of the pre-Budget report we made a formal announcement of our intention to consult on new legislation in this area. Since then, there has been detailed consultation. HMRC has sought the views of interested parties on the way forward, including on the draft legislation. The consultation has been very constructive; we believe that we have given all interested parties an opportunity to ensure that the new legislation works properly. However, if business representatives consider that there are difficulties or strong reasons why the commencement should not happen on 1 October as specified, we will consider what they say.
This is a complex area. However, given our consultation, we should be able to go for commencement on 1 October. That will give business sufficient time to prepare for the new rules and accounts and for how lenders will be taxed. As I said, this is a modernisation of the interaction of tax and accounting; it will reduce the amount of legislation devoted to repos and simplify the current rules.
The answer to the question put by the hon. Member for Fareham is yes. The details will be set out in the regulations, which will follow in due course.