Schedule 9
Finance Bill
6:30 pm
Angela Eagle (Parliamentary Secretary, HM Treasury; Wallasey, Labour)
I feel that it would be beneficial to address the amendments in the name of my right hon. Friend the Financial Secretary, as they clarify the legislation. I welcome the fact that they have been widely welcomed across the Committee. I will then discuss the other amendments in the group.
The three Government amendments address representations made regarding the draft legislation for schedule 9. The schedule amends rules identifying how companies are to be regarded as belonging to the same group for tax purposes. The hon. Member for Fareham may be right to say that this is a technical and arcane matter, but it is important to a lot of grouped companies to be able to access the privileges that come with that status.
Currently, where a parent company of a group holds more than 75 per cent. of the equity in a subsidiary company, the group can benefit from rules that allow it to surrender or claim losses from companies in the group. A number of anti-avoidance rules also apply when a company or an asset leaves a tax group. The 75 per cent. equity rule was originally a straightforward test in the 1970s when the original tax rules were formed; they were then consolidated in the 1980s and still govern those areas of taxation. That rule has had to evolve to prevent avoidance, as the financial affairs of groups of companies have become more complex over time. Now, the parent company also needs to enjoy the full rights of an equity holder. Usually, those are rights attached to the ordinary shares in a company, although they might also be subject to the rights of other shareholders and certain creditors. The limitations on the types of preference shares that can be issues to external investors without threatening the structure of a tax group creates a particular problem for financial groups that need to raise additional tier 1 regulatory capital.
The changes in the schedule resolve that problem, and I think that they have been welcomed. However, we have received representations stating that, because the only circumstances in which the rules are being relaxed relate to either regulatory capital constraints or companies in severe financial difficulty, that might not cover circumstances in which a company simply has insufficient retained profits to pay a full dividend on its preference shares. Therefore, the three Government amendments, taken together, remove any doubt that the circumstances in which dividends can be reduced or not paid refer only to the terms on which the shares are issued. Amendments 10 and 11 therefore refer specifically to the terms of the share issue. A consequent change is made by amendment 12, removing a now defunct reference to the payment of dividends.
The amendments clarify that relevant preference shares do not lose that status simply because the company has insufficient profits to pay the full dividend. That includes circumstances in which a company has no profits to distribute, so that any dividend would be ultra vires, and where a dividend paid by a regulated financial institution would breach rules on capital adequacy.
Amendments 23 to 26, which were tabled by the hon. Member for Fareham, would take the changes made to the rules for tax groups by schedule 9 outside that field and into all manner of other areas of the Tax Acts. It might not have been fully appreciated by the hon. Gentleman when he tabled the amendments, but section 832 of the Income and Corporation Taxes Act 1988 is headed, “Interpretation of the Tax Acts”. It is a general definition section, whose definitions are intended to apply to many rules throughout the Acts and in a variety of different circumstances. The definition of ordinary share capital is one of those which applies for many purposes throughout the Taxes Acts.
There are two principal arguments against amendments 23 to 26. First, they are unnecessary. The objective of schedule 9 is to address specific problems that some groups have experienced as a result of the turmoil in the global economy, particularly in the financial sector, over the past year. Those problems do not relate to section 832 of the Income and Corporation Taxes Act. The groups that lobbied for changes have no problems with that section: their problems relate purely to schedule 18 to that Act. We have received positive and welcome feedback on the changes contained in schedule 9, and the amendments I have tabled will achieve what is needed in that respect.
Secondly, as I have indicated, it seems to me to be dangerous to amend a definition that affects dozens of separate parts of the Taxes Acts purely to achieve a change in one part. Analysing the effects of such a change would be a large undertaking, and I am pretty sure that it would throw up some undesirable and unintended consequences. That is not the right way to achieve a focus on the particular area about which the hon. Gentleman is worried.
If businesses are experiencing problems with the definition of ordinary share capital in other specific areas of taxation law, HMRC will be pleased to receive representations from them about it. Consideration will then be given to whether changes are necessary to the definition of ordinary share capital for those specific areas. I hope that the hon. Gentleman appreciates that undertaking. If other specific problems are brought to our attention we will certainly try to address them, but tackling a specific issue by attempting to change a general definition, which could have undesirable effects throughout the Taxes Acts, is a recipe for large numbers of unintended consequences that would make themselves known subsequently. They might have consequences for avoidance activity or a range of other undesirable outcomes, which I am sure the hon. Gentleman certainly did not intend when he tabled the amendments.
The changes brought about by schedule 9 provide companies with greater flexibility in how they raise capital from external investors, without compromising their right to the benefits of being part of a tax group. That will assist a number of banks that are seeking to bolster their regulatory capital and help to protect depositors. We will achieve our aim in ways that will not adversely affect any group or detract from the essential anti-avoidance purpose of the tax rule that is amended. I therefore urge the Committee to accept the Government amendments and the hon. Member for Fareham to not press his.