With this it will be convenient to discuss new clause 4—Company ceasing to be a member of a group—
'.—(1) In subsection (1)(c) of section 179 of the Taxation of Chargeable Gains Act 1992 (company ceasing to be a member of group) for ''six'' substitute ''two''.
(2) In subsection (6)(a) of that section for ''6'' substitute ''2''.'.
Section 179 of the Taxation of Chargeable Gains Act 1992 was introduced to combat the ''envelope scheme'', in which groups disposed of an asset pregnant with capital gain by transferring it to an intra-group, or to a special-purpose company, on a no-gains-no-loss basis, and then sold shares, rather than
the asset, in that company. The scheme was organised so that the capital gain from the sale of shares in the special-purpose company was lower than the gain that would have come from the sale of the assets in isolation. Under the section, the transfer of the original asset intra-group is taxed if the special-purpose company leaves the capital gains group within six years of the asset's transfer. The resulting de-grouping provision was inflexible and permitted no roll-over or ability to use capital losses elsewhere in the group. This clause and clause 42 seek to address those problems. However, six years is a long time to wait, and many straightforward commercial transactions are caught by the period. That other main criticism of the section has not been addressed.
The new stamp duty anti-avoidance clauses that we shall discuss later catch similar transactions but use a two-year time limit. Therefore, new clause 4 proposes a two-year time period. It has the support of the Chartered Institute of Taxation, which takes the view that it would be sufficient to counteract envelope schemes, so we hope that the Government will consider sympathetically putting the time limit in line with the stamp duty arrangements.
Good morning, Mr. Benton. It is a pleasure to have you in the Chair this morning.
I thank the hon. Member for Arundel and South Downs for his comments, which were made in a very constructive way, as usual. He recognised the fact that businesses have been calling for the reforms for some time, that they welcome the changes and that the changes will provide useful flexibility to businesses when restructuring.
The hon. Gentleman very ably explained the purpose of the original de-grouping charge, which is a long-standing anti-avoidance provision. It prevents tax from being lost when a company leaves a group, taking with it an asset that has been transferred to it tax free from another member of the group. The hon. Gentleman gave the example of a special-purpose vehicle being set up and then sold.
The de-grouping charge is triggered if the transferee company leaves the group within six years of the asset transfer. It operates by reference to a six-year period in order to strike an equitable balance between two competing considerations, which I shall outline. I hope that I can reassure the hon. Gentleman that reducing the period to two years is not a sensible manner in which to proceed.
The measure protects the Exchequer against a form of tax avoidance that is not time limited. There is a good case for saying that the provision should not be time limited at all and, as a matter of principle, it is right that groups should not be able to escape tax on gains by transferring assets to companies that then leave the group. In that regard, the tax, which is a tax on gains, is quite different from the stamp duty charge, which is a transaction tax. Therefore, there is a different issue in principle as to how the tax should be collected and the appropriate period in which to do it.
The other competing consideration that we must take into account is that, because companies and groups must maintain records of their transactions in order to comply with the provision, an unreasonable burden would be imposed if there were no time limit. Six years has long been seen as a relatively reasonable compromise. It is consistent with the period over which companies must keep records relating to their tax assessments, and we are not persuaded by the argument that it causes major compliance difficulties.
As the hon. Gentleman said, clause 41 and clause 42, which we shall discuss shortly, make significant changes to the de-grouping charge. Clause 41 will allow a gain or loss arising when a company leaves a group to be reallocated elsewhere within the group, thus creating greater flexibility in offsetting losses and gains. Clause 42 enables gains that arise on business assets to qualify for roll-over relief if the conditions for such relief are otherwise met.
As the hon. Gentleman said, businesses wanted the changes, which were widely consulted on and widely welcomed. They will stop the de-grouping charge being an impediment when companies wish to restructure for commercial reasons and are much more important to business than any potential change to the six-year rule. We are not persuaded that further relaxation of the de-grouping charge is either necessary or desirable, so I urge the Committee not to accept the hon. Gentleman's new clause.
May I just ask whether, under the arrangements in clause 41, the Minister sees any other way in which totally innocent transactions that would otherwise have been caught under the six-year rule can escape being treated unfairly? The logic of leaving the six-rule year, which is why a six-year period is taken, shows that the intention of the clause is finally to tidy up all unfair or problematic issues that existed before.
I hope that the hon. Gentleman accepts the principle that companies should not be able to restructure in order to avoid legitimate tax being paid. It is right in principle to collect that tax regardless of the time period involved. The six-year rule is a reasonable balance between the competing tensions of the need to collect tax and minimising compliance burdens on business. It does not inhibit commercial transactions because it is about providing companies with greater flexibility.
As I said, businesses need to keep tax records for that length of time. Significant technological advances mean that it is easier than in the past to keep records and track asset transfers, and that that not a significant burden on companies. If companies come to us with evidence that it is a significant burden, we shall obviously think of ways in which to reduce the compliance burden further. However, I do not see it as an impediment to business.
As I said at the outset, we are generally happy with the clause, as is business. I was pleased to hear the Economic Secretary's comment that the Government will keep the issue under review. The crucial issue concerns what is sufficient to counteract the envelope scheme arrangements.
Question put and agreed to.
Clause 41 ordered to stand part of the Bill.
Clause 42 ordered to stand part of the Bill.
Schedule 7 agreed to.