Schedule 12
Finance Bill
10:45 am
Ian Pearson (Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform; Dudley South, Labour)
I beg to move amendment 18, in schedule 12, page 128, line 5, at end insert—
‘(1A) In determining for the purposes of subsection (1)(c) whether subsection (1) of section 171 would have applied, it is to be assumed that subsection (1A)(b) of that section read—
“(b) that, at the time of the disposal, company B is resident in the United Kingdom, or carrying on a trade in the United Kingdom through a permanent establishment there.” ’.
It is a real pleasure to serve under your chairmanship, Mr. Hood. At the 2007 pre-Budget report the Chancellor launched three reviews involving the Treasury and Her Majesty’s Revenue and Customs working in partnership with business to evaluate how a range of tax legislation could be simplified. Clause 31 and schedule 12 deliver the first simplification measure from one strand of that project, which deals with the capital gains of groups of companies.
The corporation tax system allows limited offsetting of the capital losses of one company against the gains of another when calculating their taxable profits. In the Finance Act 2000 that procedure was liberalised, so that an asset could be deemed to have been transferred within the group before an onward sale. That saved the administrative burden and expense of making an actual intra-group transfer. However, those rules do not allow all gains and losses to be deemed as transferred within a group; they only apply to the sale of an asset to a third party. That means that the rules do not apply when a gain or loss results from the liquidation of a group company or when a loss arises on the making of a negligible value claim. Losses on assets that have been destroyed, or gains from insurance receipts in such a situation, are also outside the scope of this otherwise useful tax measure.
The CBI in particular highlighted in its recent Budget representations that those restrictions can be administratively burdensome. Schedule 12 provides groups of companies with a simpler procedure to offset chargeable gains with allowable losses by removing those restrictions. Rather than deeming assets to be transferred intra-group prior to a third-party sale, companies will be able to elect for a capital gain or loss to be reallocated to another group company that is within the charge to corporation tax.
Amendment 18 addresses one area in which we have received representations that, because of a technical defect in the schedule, the policy aim might not be achieved. The issue only affects groups that wish to transfer a gain or loss to a non-resident company in a group that trades in the UK through a permanent establishment—a branch or agency here. Since 2000, non-resident companies have been treated as part of the capital gains group. Tax-neutral transfers of assets can be made to a non-resident company if it has a permanent establishment in the UK and the assets are used for the business of that establishment. That rule ensures that the treatment applies only to those assets on which the non-resident company will be chargeable to corporation tax on gains made from their disposal. That same condition is imported into the rules in schedule 12, but we have received representations from the Law Society that the new rule needs to be adapted further to operate properly when a non-resident company is involved.
When an election is made to transfer a gain or loss from the disposal of an asset to a non-resident company, the schedule already has a rule to ensure that a gain or loss on the asset will be a chargeable gain or an allowable loss to the non-resident company. That applies even where the asset would not otherwise be a chargeable asset for the non-resident company. However, the representations that we have received point out that one condition to be satisfied before an election can be made is that the asset is used in the UK trade of the permanent establishment, which is unnecessary in this context. Amendment 18, therefore, adapts the rule about when companies can make an election, to remove any doubt that non-resident companies with UK permanent establishments can always fulfil the conditions. I am grateful for the Law Society’s representation, which is one that the Government are happy to act on.
The changes made by the schedule sweep away some restrictions that have prevented the full matching of capital gains and losses within groups and simplify the complex rules that deal with group relationships. That is the kind of simplifying change that the CBI and other representative bodies have long sought. I commend the amendment to the Committee.