Clause 101 - References to accounting practice and periods of account

Finance Bill – in a Public Bill Committee at 5:45 pm on 11th June 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 5:45 pm, 11th June 2002

I beg to move amendment No. 179, in page 78, line 45, at end insert 'and'.

Photo of Joe Benton Joe Benton Labour, Bootle

With this it will be convenient to consider the following amendments: No. 180, in page 79, line 1, leave out from 'companies' to end of line 2.

No. 181, in page 79, line 3, at end insert—

'(c) means generally accepted accounting practice with respect to accounts of non-UK companies that are intended to give a true and fair view, or equivalent, as applied in their country of incorporation.'.

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

The amendments have been tabled because the point has been raised that it does not make much sense to require all companies operating in the UK to use UK generally accepted accounting practice for their accounting. Many branches of such companies will not be UK-incorporated registered businesses and it would make more sense to allow those branches to use the GAAP of their own country rather than forcing them to use the UK GAAP in respect of their branch activities. To do that would create unnecessary administrative burdens for such branches and for companies which are incorporated outside the UK and thus not subject to UK company law but which, for whatever reasons, may be UK tax resident.

It is possible that the profession has misunderstood the requirement in the clause, but I raise the matter to give the Government the opportunity to clarify their intention.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

There has probably been some misunderstanding. Clause 101 standardises definitions of accounting practice used in existing tax legislation. All accounting references are now to ''generally accepted accounting practice'', and one thing the clause does is to move into a general interpretation section a standard definition of GAAP that already appears in a number of places in tax law.

The part of the definition of GAAP that the Opposition seek to amend says that GAAP means GAAP as it applies to UK companies. However, that is not a new idea—at least 10 different parts of the tax code specify that it is accounting practice as it applies to UK companies that must be followed. The clause brings all those different definitions into one place with one wording.

There is one important place where the fact that it is UK GAAP that must be followed has been made explicit. This is in the general rule governing the computation of profits of a trade in section 42 of the Finance Act 1998, which required taxable profits to be computed using an accounting basis which gave a ''true and fair view''. That wording in section 42 is being replaced with the new definition of GAAP, but the requirement to provide a ''true and fair view'' is maintained because that is required by the definition of GAAP.

The opposition amendments should therefore be resisted on two grounds. First, references in the tax code to accounting practice have made it clear that it is UK accounting practice that is meant. Secondly, in applying the UK tax system, and to be fair to all businesses operating in the UK, there must be consistency. Why should there be a tax advantage or a disadvantage for a company because it follows whatever is a true and fair view in some other state or country? The amendments assume that there will always be a ''true and fair view'' or an equivalent concept in every other country. Of course, we do not insist that overseas companies draw up their accounts using UK GAAP. We require it to be followed only for the purposes of computing tax. It is likely that company law and accounting rules in other territories would show much the same result as if the UK GAAP had been used. On the two grounds that I have set out, I hope that the hon. Gentleman will withdraw the amendment.

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

I am glad that the Financial Secretary made it clear that there was no intent to require such non-UK-incorporated companies to use UK GAAP for their accounts. There is clearly an argument about tax fairness in terms of use of UK GAAP for UK tax calculation purposes, but the provision obviously adds to the burdens on businesses that have branches here, because their calculations for UK profits will be different from those for their overall accounts. Therefore, there will be yet more notes in the accounts explaining the differences.

Clearly, in an ideal world, GAAP would be fairly common among at least the developed economies. I wonder whether the Government have considered how much tax materiality there is on the subject. The branch companies are mostly either north American or continental European. If the differences are not that major, is the exactness of the requirement to use UK GAAP for tax purposes worth the bureaucratic hassle?

What discussions have the Government had with the profession? Its representatives have raised the issue broadly with me. The issue is technical, not political, so we would not want to put the amendment to a vote, but I would like a further response from the Financial Secretary on those points.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I have two points in response. First, there is nothing new in the provision. It makes a reference that was already in the tax system explicit by putting a definition in one place for ease of reference. Secondly, consistency of tax treatment in the UK is important. Although there may not be great differences between member states in the European Union, such uniformity is important. The last thing that we want to do is to introduce arbitrage when a company decides that it is advantageous for it to use one treatment rather than another. I urge the hon. Gentleman to withdraw the amendment.

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

It is interesting that the Financial Secretary should say that the Government would not want to encourage arbitrage, as there is a massive and dangerous encouragement of arbitrage for self-employed small traders in the Bill, which will cost the Revenue a fortune.

However, I have said that the issue is not major. I hope that the Government will keep it under review, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 101 ordered to stand part of the Bill.