Schedule 15
Finance Bill
5:45 pm
Mark Hoban (Shadow Minister, Treasury; Fareham, Conservative)
Not wishing anyone to think that I had exhausted schedule 15—I have been overwhelmed by the Minister’s generosity in accepting some of the amendments that I tabled—I want to explore one or two points that I think are important. The Minister probably addressed one of them when we debated the last but one group of amendments.
One issue about the construction of the measure is the use of the “available amount” that is defined in part 8 and the “tested expense amount” or “tested income amount” that is defined in part 7. Calculations of the former are based on financial statements, whereas calculations of the latter are based on tax computations. That would not be a problem if there were a perfect alignment between UK generally accepted accounting practice and international financial reporting standards and the basis on which tax computations are prepared. Life would be fantastic if it were that simple, but it is not, and there are gaps. That creates a tension when those differences are important in the calculation of either the tested amount or the available amount.
One issue that the Minister referred to when we debated the penultimate group of amendments was deadlocked joint venture companies. One party may have 75 per cent. of the ordinary share capital but 51 per cent. of the income, but because of the arrangements between the two owners, there is deadlock, so it does not count towards control when it comes to the consolidated results of either partner in the venture.
The tested expense amount is defined as
“the sum of net financing deduction of each relevant group company”
in paragraph 52(1), but according to paragraph 68(6), a relevant group company would be a “75% subsidiary”. The situation is that the tested amount would include the expenses of a relevant group company, but the available amount would not take that into account because of the deadlock arrangements between two shareholders in a joint venture such as the one I described. I should be grateful if the Minister could tell us whether that anomaly was resolved by the last but one group of amendments or whether further work needs to be done to get the two calculations into line.
Another issue arises on the same point in connection with financial instruments by virtue of paragraph 39(2). Where a company has borrowed in dollars and then swapped the loan into sterling, if the contract rate accounts for the arrangement of the UK GAAP there would be a synthetic sterling interest which would be a finance expense account. However, where the accounts and the arrangements are under FRS 26 or IFRS, the US dollar interest would be included with the swap being ignored. Is this the result that is intended here?
Under paragraph 39(3), where a company accounts for a loan on a fair value basis, fair value movements are included within the finance expense account and therefore the tested amount. However, the equivalent amounts are not included in the available amounts. So a gap—that is perhaps the wrong word to use in this context—is opening up. Another issue may arise on partnerships because of the way they are dealt with and the question whether they are transparent for tax purposes. It is difficult to assess how significant these issues are, but I should be grateful if the Minister could share his thoughts with the Committee on how the differences between accounting and tax treatment work.