Treatment of Convertible Shares or Securities for Purposes Relating to Group Relief etc.

Orders of the Day — Finance Bill – in the House of Commons at 4:19 pm on 11th July 1989.

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(1) Paragraph 1 of Schedule 18 to the Taxes Act 1988 (which contains definitions relating to group relief) shall be amended in accordance with this section.

(2) For sub-paragraph (3)(b) there shall be substituted—(b) do not carry any right either to conversion into shares or securities of any other description except—

  1. (i) shares to which sub-paragraph (5A) below applies,
  2. (ii) securities to which sub-paragraph (5B) below applies, or
  3. (iii) shares or securities in the company's quoted parent company, or to the acquisition of any additional shares or securities;"

(3) For sub-paragraph (5)(a) there shall be substituted—(a) which does not carry any right either to conversion into shares or securities of any other description except—

  1. (1) shares to which sub-paragraph (5A) below applies,
  2. (ii) securities to which sub-paragraph (5B) below applies, or
  3. (iii) shares or securities in the company's quoted parent company, or to the acquisition of any additional shares or securities;"

(4) After sub-paragraph (5) there shall be inserted—(5A) This sub-paragraph applies to any shares which—

  1. (a) satisfy the requirements of sub-paragraph (3)(a),(c) and (d) above, and
  2. (b) do not carry any rights either to conversion into shares or securities of any other description, except shares or securities in the company's quoted parent company, or to the acquisition of any additional shares or securities.
(5B) This sub-paragraph applies to any securities representing a loan of or including new consideration and—
  1. (a) which satisfies the requirements of sub-paragraph (5)(b) and (c) above, and
  2. (b) which does not carry any such rights as are mentioned in sub-paragraph (5A)(b) above.
(5C) For the purposes of sub-paragraphs (3) and (5) to (5B) above a company ("the parent company") is another company's "quoted parent company" if and only if—
  1. (a) the other company is a 75 per cent. subsidiary of the parent company,
  2. (b) the parent company is not a 75 per cent. subsidiary of any company, and
  3. (c) the parent company's ordinary shares (or, if its ordinary share capital is divided into two or more classes, its ordinary shares of each class) are quoted on a recognised stock exchange or dealt in on the Unlisted Securities Market;
and in this sub-paragraph "ordinary shares" means shares forming part of ordinary share capital.
(5D) In the application of sub-paragraphs (3) and (5) to (5B) above in determining for the purposes of sub-paragraph (5C)(a) above who are the equity holders of the other company (and, accordingly, whether section 413(7) prevents the other company from being treated as a 75 per cent. subsidiary of the parent company for the purposes of sub-paragraph (5C)(a), it shall be assumed that the parent company is for the purposes of sub-paragraphs (3) and (5) to (5B) above the other company's quoted parent company.

(5) In sub-paragraph (6) for the words "to (5)" there shall be substituted the words "to (5D)".

(6) This section, so far as relating to Schedule 18 of the Taxes Act 1988 in its application (by virtue of section 137 below) for the purposes of subsections (ID) and (IE) of section 272 of the Taxes Act 1970, shall be deemed to have come into force on 14th March 1989.'.—[Mr. Norman Lamont.]

Brought up, and read the First time.

Photo of Mr Norman Lamont Mr Norman Lamont , Kingston upon Thames 4:32 pm, 11th July 1989

I beg to move, That the clause be read a Second time.

The purpose of this new clause is to help groups of companies raise finance through subsidiary companies, either by issuing fixed-rate preference shares or by raising normal commercial loans. If those shares or loans carry a right to conversion into other shares or securities, at present the subsidiary company may not be entitled to the normal tax reliefs available to a group of companies. For example, it may not be able to claim group relief, which allows the trading losses of one company to be set against the taxable profits of another member of the group.

In some cases it is right that these tax reliefs should not be available. For example, if the conversion right is into ordinary shares of the company, the economic ownership of the company may lie largely outside the group. In other words, the holder of the preference shares or the lenders may have a large stake in the performance of the company, so, if the company does well, its right to convert into ordinary shares in the company will become more valuable. If the tax reliefs for groups of companies were available in such cases, it would be possible to devise arrangements which would abuse the reliefs to avoid tax. The new clause does not affect such cases.

However, in other cases, the conversion rights do not give the shareholder or the lender a stake in the performance of the company. For example, a loan may be convertible into fixed-rate preference shares, or the conversion right may be into shares or securities in the parent company of the group. In such cases there is no reason why the normal tax reliefs for groups of companies should not be available. The new clause therefore provides for conversion rights like those to be disregarded when establishing the economic ownership of a company for the purposes of group relief. The group relief ownership rules are applied for the purposes of some other tax provisions, and the change will therefore affect them as well.

The other provisions concern the surrender of advance corporation tax by a company to a subsidiary company, the payment of dividends or interest between members of a group, and the definition of a group for capital gains tax purposes.

This change is highly technical. It will not have a major impact on the operation of the tax system. The new clause builds on the changes that we made in clause 99. If the hon. Member for Islington, South and Finsbury (Mr. Smith) recalls, we restricted group relief to avoid a number of artificial devices and circumstances by which the economic control of a group was not where it might have been thought to be. There were artificial devices to create groups of companies to get group relief. In framing clause 99, we introduced some provisions that could harm certain perfectly legitimate operations.

The new clause simply relieves the provisions that we made in clause 99 so that we will not damage genuine commercial fund-raising operations of the type that I have described in my examples. The provision will not damage companies in that situation. It is because we have received a number of representations detailing examples where genuine commercial operations might be affected adversely that we have made these modest changes. However, the new clause will not have a major impact on the operation of the corporation tax system.

Photo of Mr Chris Smith Mr Chris Smith , Islington South and Finsbury

I have examined the new clause with considerable care. As the Financial Secretary has stated, it represents a small loosening of the fairly tight provisions of clause 99, which passed its Standing Committee stage with flying colours.

The provisions of the new clause are relatively unexceptionable. However, I have one question. The Financial Secretary stated that he did not expect the provisions to make much difference to the corporation tax regime. Have the Government made any estimates of the possible lost revenue to the Exchequer as a result of this provision?

Photo of Mr Norman Lamont Mr Norman Lamont , Kingston upon Thames

The cost of the change is likely to be negligible. Both the new system introduced here and in clause 99 will produce approximately the same yield as the old system, but the timing of receipts might be different in individual cases.

Clause read a Second time, and added to the Bill.