Clause 44 - Share exchanges and company reconstructions

Finance Bill – in a Public Bill Committee at 12:00 pm on 21st May 2002.

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Question proposed, That the clause stand part of the Bill.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

The clarification definitions that the clause covers apply only for CGT purposes, which could lead to anomalies between CGT and other taxes, stamp duty in particular. I flag that up for when we come to the relevant clause. The Chartered Institute of Taxation says that it would like confirmation that the clarification provisions are not intended to introduce any substantive change in the law.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

The clause and schedule 9 reform the capital gains rules for share exchanges, takeovers and other forms of company reconstruction. It is important for businesses and investors alike that the rules should cater for all the situations that may arise in practice and that they should be on a firm statutory footing. The changes that we are making will do just that.

The rules will prevent tax on capital gains standing in the way of commercial reconstructions, rolling over any gain that would otherwise arise on the reconstruction. The current rules, which go back to the introduction of CGT in 1965, are not entirely satisfactory. There has always been some uncertainty about what types of corporate reconstruction qualify as a scheme of reconstruction, because there has been no formal definition of that expression. People have had to rely on judgments and court cases, which stretch back to the early years of the last century and inevitably reflect the different business world of that era. Over the years, the Inland Revenue has filled the gap to some extent by publicising what it regards schemes of reconstruction to be.

Last year, a court decision established that some types of reconstruction that the Revenue had accepted as schemes of reconstruction did not qualify as such in law, which caused unease in the business community. The decision prevented a variety of arrangements from qualifying as schemes of reconstruction, although there was no policy reason why they should not benefit from favourable tax treatment. Therefore, we are introducing new provisions to restore the position to what it was before the court decision. They put an end to the uncertainty that surrounds qualification for schemes of reconstruction by defining it in the Bill. We have also taken the opportunity to extend the scope of the provisions for share exchanges to companies that do not have share capital by treating the interests of members as though they were shares. The provisions will now apply to exchanges involving companies limited by guarantee, for example.

The hon. Member for Arundel and South Downs asked about the interaction of the provisions with the stamp duty regime. CGT and stamp duty are entirely different taxes, with different aims and separate rules. I can assure him, however, that modernisation of the statutory regime, to which we shall come in due course and which was announced in the Budget, provides an opportunity to reconsider the stamp duty rules for schemes of reconstruction. Consideration of the reconstruction reliefs is included in the modernising stamp duty consultation process, which is intended to produce new legislation in next year's Finance Bill. If any anomalies arise, we shall have an opportunity to take them into account.

For those reasons, I believe that the clause and schedule 9 will be widely welcomed by business for the certainty and coverage that they provide.

Question put and agreed to.

Clause 44 ordered to stand part of the Bill.