Schedule 9 - Chargeable gains: share exchanges

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

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 12:00 pm, 21st May 2002

I beg to move amendment No. 71, in page 173, line 31, after 'capital', insert

', preference share capital or debentures'.

Photo of Joe Benton Joe Benton Labour, Bootle

With this we may discuss the following amendments: No. 72, in page 173, line 33, after 'capital', insert

', preference share capital or debentures'.

No. 73, in page 173, line 34, after 'capital', insert

', preference share capital or debentures'.

No. 74, in page 173, line 37, after 'capital', insert

', preference share capital or debentures'.

No. 75, in page 173, line 39, after 'capital', insert

', preference share capital or debentures'.

No. 83, in page 173, line 41, after 'capital', insert

'preference share capital or debenture capital'.

No. 76, in page 173, line 42, after 'capital', insert

', preference share capital or debentures'.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 12:15 pm, 21st May 2002

The amendments deal with essentially the same technical issue, which was raised by the Law Society. Clause 44 and the schedule provide welcome codification of the definition of reconstruction for the purposes of capital gains tax reliefs, and the amendments would ensure that company reconstructions included those in which not only ordinary shares, but preference shares or debentures were exchanged for new shares. The Law Society raised several specific points, although I will not read out a great addendum. The Government could, however, usefully consider such points before the Bill becomes law.

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

I cannot support amendments Nos. 71 to 76, but I hope to persuade the hon. Gentleman that they are not necessary.

A company may wish to simplify its capital structure as it goes through a scheme of reconstruction, and the amendments are designed to facilitate that. However, various arrangements that are already in place and which meet the requirements in the Bill will enable a company's structure to be simplified in that way. For instance, the company can reorganise its capital structure before starting the scheme of reconstruction, or the successor company can reorganise its capital structure afterwards. We have included provisions in the Bill to allow for such changes.

I should also note that the meaning of ordinary share capital is quite wide. For example, participating preference shares can count as part of a company's ordinary share capital. Some companies with preference shareholders will, therefore, have no difficulty in simplifying their share capital.

I do not oppose amendments Nos. 71 to 76 simply because companies can already effect a scheme of reconstruction by making arrangements fit their circumstances. The problem is that the amendments would have the undesirable effect of widening the scope of what is a reconstruction of a company beyond reasonable bounds. The essential feature of such a scheme is that those who effectively own the business before the reconstruction are still the owners afterwards. We have preserved that key concept in the new provisions by requiring that only holders of ordinary shares receive ordinary shares in the arrangements for the reconstruction. It is the holders of ordinary shares who own the business, because they are entitled to the profits.

That essential feature of reconstructions has received long-standing approval from the courts and we should not abandon it, but that is what amendments Nos. 71 to 76 would do. They would allow debenture holders and others who are not co-owners of the business to acquire an ownership stake. Arrangements whereby the ownership of a business is passed to someone else could then be structured as schemes of reconstruction and would benefit from the capital gains rollover treatment that applies to such schemes. For that reason, I must ask the Committee to reject the amendments.

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

I understand the point of principle that the Minister raises, and I do not want to undermine it. I simply want to know what the position will be within the existing parameters if our amendments are not made. Will there be a problem with reconstructions that are designed to simplify a company's capital structure, where ordinary shares are issued to preference shareholders or debenture holders of the original company or companies?

Photo of Ruth Kelly Ruth Kelly Economic Secretary, HM Treasury

I do not believe that that is the case. There is nothing in the new rules to prevent such companies from effecting a scheme of reconstruction. It is merely that preference shareholders and debenture holders cannot be issued ordinary shares in the reconstruction. If a company wishes to simplify its capital structure and go through a reconstruction, it can arrange its matters in such a way that they fall within the meaning of reconstruction as it is now defined. I hope that that reassures the hon. Gentleman.

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

I thank the Minister for her comments. The Government might want to look at that area in a little more detail, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 9 agreed to.