I beg to move amendment No. 185, in page 81, line 29, after 'assets', insert 'to a connected person'.
The amendment has been suggested to us by the Institute of Chartered Accountants because it feels that introducing a fiscal requirement to account for stock and work in progress on a just and reasonable basis would impose quite unrealistic obligations on parties who were actually at arm's length.
John Healey: Before discussing the amendment itself, let me explain the background to Clause 104. The clause is designed to modernise the rules governing the valuation of trading stock on the transfer of a trade. It removes existing anomalies and puts the treatment of trading stock in these circumstances on a basis that is comparable with other tax rules, including the new code for intangible asset that we have just been debating.
Under current law, trading stock that is transferred when a new owner takes over is generally—and in the circumstances that the clause is directed towards, always—brought into account in the amount of the consideration agreed between the parties. That is out of line with the capital allowances and capital gains rules. In both cases, asset values are determined by apportioning the total consideration paid for the trade on a just and reasonable basis.
That approach is not quite the same as that proposed under schedule 29 for transfers of intangible assets, but it is essentially compatible with it. Schedule 29 is founded on a just and reasonable apportionment of the consideration passing on the transfer of a business. However, it goes a step further in requiring where possible that an apportionment made in a company's accounts is to be regarded as ''just and reasonable''.
The rule for trading stock, on the other hand, is not compatible with what is proposed for intangibles or with the current rules for capital allowances and capital gains. The incompatibility of the current rules can give rise to anomalies, with businesses in some cases being taxed on amounts in excess of the total consideration paid for the trade. That is manifestly unfair. In other cases, businesses obtain more tax relief than the total amount that they have paid. That is also wrong. The new rule should put an end to these anomalies. The arrival of the new intangibles regime has made change in this area more urgent, but it is a change that is desirable in its own right. We are therefore applying that change for income tax as well as corporation tax, and regardless of whether the assets of the trade transferred include intangibles.
The purpose of the amendment is to restrict the ''just and reasonable'' rule to cases where the parties to the transfer of a business are connected persons. The Committee will not be surprised, in light of what I have said about the reasons for introducing the clause, that I cannot accept the amendment, which is both misconceived in concept and drafted in such a way that it would not achieve the purpose that the hon. Member for Arundel and South Downs is anxious to secure.
The amendment is misconceived because it would leave in place incompatible tax rules and perpetuate the anomalies to which I have referred. The existing capital allowance and capital gains rules do not limit ''just and reasonable apportionment'' to cases where the parties are connected, and I see no reason why the proposed rule for stock should do so. Those businesses that ended up being taxed on more than their total sale proceeds would not thank the hon. Gentleman.
It is hard to see why this change should impose any unreasonable obligation on taxpayers. On the contrary, it will provide for consistent treatment of the various assets bought and sold on the transfer of a trade. It will therefore make the system easier to operate and fairer. The existing capital gains and capital allowances rules, with which the clause would align the treatment of stock, have not, as far as I am aware, imposed unreasonable burdens on business. These rules have not been a prominent subject in the Budget representations made by business or specialist tax practitioners.
I do not, therefore, accept the principle behind the amendment, that the allocation of the overall sale proceeds on the transfer of a business should be capable of being overridden for tax only when the parties are connected with one another. In any event, the amendment would not have its intended effect. It would not provide for the value of trading stock to be determined on the basis of a just and reasonable apportionment in cases where a business is transferred between connected persons. That is because the transfer of trading stock in these circumstances is already subject to a different rule. In these circumstances, the value of the trading stock is the value that would have been placed on it if the stock had been transferred between independent parties acting at arm's length.
I refer the hon. Gentleman to section 100(1)(a) of the Income and Corporation Taxes Act 1988. The clause, with or without the amendment, has no impact on that special rule. The amendment, by confining the impact of the clause to situations where it has no effect, is equivalent to removing the clause from the Bill. Therefore I cannot support it, and if the hon. Gentleman decides to press it to a vote I shall ask the Committee to reject it.
May I just establish the issue of the valuation of stock? I have practised as a chartered accountant and worked on transactions in which the apportionment of considerations is important. Ordinarily, I would expect that stock to transfer at a value determined in line with United Kingdom GAAP. Is the expectation in the clause that the value under UK GAAP does not necessarily equal a just and reasonable apportionment of consideration?
If we are talking about a divergence in valuation, the amendment tabled by my hon. Friend the Member for Arundel and South Downs is important because it seems unnecessary to add an additional layer of complexity to a transaction over and above that which normally arises through the valuation of stock in determination of consideration, goodwill or other aspects of a transaction. There is a perfectly reasonable valuation technique available in UK GAAP and it would be odd to introduce another one when we are referring to the just and reasonable apportionment of consideration.
John Healey: As I explained earlier, I do not accept that the provision introduces additional complexity. There is a much stronger argument that the better alignment and greater coherence in the proposal will make things easier for business, not more complicated.
The short answer to the hon. Gentleman's question about the valuation of stock being the same as under the GAAP provisions is that it nearly always is.
The Minister's latter comment is the crucial point. Perhaps I should have made it clear that this is a probing amendment. As it was suggested by the Institute of Chartered Accountants I thought that the Government would want to take it seriously. The chartered accountants' underlying point, on which my hon. Friend the Member for Fareham commented, is that ''just and reasonable'' needs to mean GAAP accounting treatment for arm's length parties; and if, while understanding the consistency arguments, the Government were thinking of some other accounting basis it would not be reasonable.
To judge by what the Minister said, the problem has probably been solved, but I trust that the Government will consult the Institute of Chartered Accountants to ensure that everyone is happy about it. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 104 ordered to stand part of the Bill.
Clause 84 ordered to stand part of the Bill.