I beg to move amendment No. 182, in page 373, line 33, at end insert
'except for those assets that are subject to Part 4, paragraph 26 (Realisation of a pre-commencement asset).'.
With this it will be convenient to take amendment No. 183, in page 383, line 11, at end insert—
'Realisation of a pre-commencement asset
26.—(1)This paragraph applies where there is a realisation of a ''pre-commencement asset'' that is an intangible fixed asset—
(a) that was held by the company, or in the same worldwide group, before commencement, as defined by Part 14 of this Schedule, and
(b) on which no deduction has been claimed under Part 2 of this Schedule.
(2) The company can elect to tax the realisation of the pre-commencement asset under the ''existing law'', as defined by Part 14 of this Schedule.
(3) The election must be made in writing to the Board of the Inland Revenue within two years of the end of the accounting period during which the realisation takes place.
(4) In particular, the making of the election will allow the company to roll over the proceeds on realisation of the pre-commencement asset under the replacement of business assets rules in section 152 of the Taxation of Chargeable Gains Act 1992.
(5) Where the creation of an intangible fixed asset straddles the commencement date the election may be made only in respect of the pre-commencement portion. The proceeds on realisation should be apportioned between pre and post commencement on a just and reasonable basis.'.
The amendments are designed to allow companies that held intangible assets before 1 April 2002, on which no deduction has been claimed under the new legislation, to roll over the proceeds on disposal under the old rules—that is, against land and buildings—rather than being able to roll over proceeds against only the acquisition of new intangible fixed assets. In essence, if that were not the case, there would be an element of retrospection in the operation of the schedule. We hope that the Government will take note, and that they will be able to address the issue satisfactorily if they do not accept the amendments.
Thank you, Mr. Gale, and good morning. As I said to your co-Chairman on Tuesday, it is a great privilege to join the Committee, and I very much look forward to serving on it under your chairmanship.
The schedule would enact a major reform of the corporation tax treatment of intangible assets. The reform modernises the corporate tax base, providing relief for the cost of acquiring intangible assets when none had previously been available. Before I turn to the amendments, let me introduce clause 83, and schedules 29 and 30, and explain the background to this important new element of the legislation. It introduces a comprehensive regime that will provide consistent treatment of companies' expenditure and receipts in respect of intangible assets.
The new regime replaces an outdated and, in places, incoherent accretion of rules based on judicial decisions and occasional legislation, which had grown up piecemeal over nearly 150 years. It marks a further step in the Government's programme of corporate tax reform, which is designed to ensure that the tax system reflects the realities of today's business and competes with the best in the world. A modern system for taxing intangible assets will encourage companies to take advantage of new opportunities in the knowledge-based economy and will contribute to the Government's goal of increasing national productivity.
The proposals have been the subject of extensive consultation. The Government have issued six consultation documents since March 1998. The Inland Revenue has established a consultative group drawing on all representative employer organisations, and draft clauses were published with the pre-Budget report by my right hon. Friend the Chancellor of the Exchequer in November 2001. To that degree, therefore, business and tax practitioners and specialists have been closely involved in the development of the new regime, both individually and through their representative bodies. I pay tribute to all those who made a contribution. The Bill has been very much improved by that process, and the reform has been widely welcomed. The proposals have been developed considerably, particularly through the inclusion of roll-over relief and grandfather clauses.
The new regime provides for companies to obtain tax relief for the cost of intangible assets, including goodwill, brand names, trade marks and other intellectual property; in most cases, it will be based on the amortisation reflected in the accounts. The use of accounting write-downs to determine the tax relief breaks new ground, providing greater flexibility and bringing tax and commercial profits closer together.
The coverage of the new regime is also broadly aligned with the accountancy definition contained in financial reporting standard 10. That will ensure that relief under the new rules is available for the full range of intangible assets, with very few exceptions. It will enable the new regime to keep pace with commercial developments, without the need continually to add to the legislation to provide relief for new forms of intangibles as they develop in an increasingly fast-moving business world.
Mr. Michael Jack (Fylde): Just for clarification—not necessarily now, but before the end of our debate—will the Minister say what he meant by those delphic words ''with a few exceptions''? I am interested to know what has been left out.
What the right hon. Gentleman called my delphic words were ''very few exceptions''. I shall be happy to clarify that at the appropriate point.
Moving from a system of rigid tax rules set out in legislation to one that follows accounting practices will mean that, from the outset, the new provisions, which I hope will be welcomed by all hon. Members, will give us the flexibility for future developments.
The Minister mentioned accounting practices. I wonder whether he will say a few words about the international dimension. It is clear, post-Enron, that there are significant differences in accounting standards and accounting definitions between, for instance, the United Kingdom and the United States, which may cause problems for multinational and international companies. I wonder whether such conflicts will be resolvable under the proposals.
I do not see that such conflicts are likely. We will be dealing in later amendments with a divergence in practice between the USA and the UK. However, the measures draw directly on established accounting rules and practices, so they give us a consistent code under which to operate the tax relief system. We therefore have some certainty that they will operate securely and give us the assurance that we need as we move away from the previous approach, under which tax rules were specified in legislation.
Under the new regime, disposals of intangible assets will be taxed on an income basis. To ensure that companies have an incentive to reinvest, however, a roll-over relief will apply where disposal proceeds are reinvested in new intangible assets. As I explained, that feature is a direct result of consultations during our preparation of the provision.
Intangible assets that companies held on 1 April this year—the date on which the new provisions came into effect—will generally be taxed under current law. That treatment responds to concerns expressed during the consultation by business and experts, who felt that existing capital gains assets should remain subject to the capital gains rules and should be grandfathered on any future sale. Disposals of such assets will, however, qualify for roll-over relief under the new rules for intangibles, rather than under the capital gains roll-over relief.
One point that the Law Society made was that non-trading losses on intangible fixed assets to be carried forward to the next accounting period should be added to the list of carry-forward provisions. Is the Minister saying that the tax treatment of such assets should fall under the capital gains tax regime, not the proposed regime?
John Healey: If I may, I shall return to that at the appropriate point in my remarks.
Schedule 29 sets out the detail of the provisions, and schedule 30 sets out the consequential amendments that are needed to other taxation legislation. Government amendments Nos. 212 to 214 are not substantive; they simply correct minor drafting errors that we have picked up over the past few days. They therefore form a proper part of schedule 30.
The legislation has been drafted in the new style that we adopted for the tax law rewrite project. The consultation draft that the Inland Revenue published at the time of the 2001 pre-Budget report was widely welcomed for its clarity and, by tax legislation standards, for its relatively plain English. That certainly helped the recent consultation process.
The reform in clause 83 and the accompanying schedules marks an important step on the road to a modern and competitive UK corporate tax system. As the hon. Member for Arundel and South Downs explained, the amendments would make capital gains roll-over relief available to companies that dispose of their pre-commencement intangible assets—those that pre-date 1 April—as an alternative to the roll-over relief provided by the new intangibles regime. That gives companies the scope to reinvest gains in a wider range of assets—tangibles and intangibles—and, in some cases, to defer tax on such gains for longer.
By way of background, I should explain that the roll-over relief provisions and the rules for dealing with companies' existing assets were the product of the extensive consultation process. The rules were designed to respond to the issues that business raised with us. They have, therefore, been widely welcomed. In particular, the facility to roll-over gains that are taxed as income under the new rules against the acquisition of further intangibles is unprecedented and generous.
The transitional arrangements, too, are already generous to companies. Companies are able to benefit from capital gains loss relief, indexation and 1982 values on the disposal of their existing assets at the same time as enjoying the new relief against current income on the assets that they buy.
To put it simply, the regime is predicating a system whereby the gain is brought in to tax but is also shielded and can be used for roll-over within the capital gains tax regime.
I shall come to that point. I shall pull together my responses to the remarks that have been made at the end of my comments.
The transitional arrangements are generous. A range of benefits is available to companies that, at the same time, enjoy the new relief against the current income of the assets that they buy. Roll-over relief has been expanded as a result of the consultation within the new framework, to cover capital gains on all pre-commencement intangibles, not just the limited
categories that currently qualify for capital gains roll-over relief. While companies can no longer defer the gains on those disposals when they buy assets within the capital gains rules, they can now do so by reinvesting in not only the limited categories of intangible assets that currently qualify for capital gains roll-over relief but all intangibles within schedule 29.
Are the Government considering enlarging the scope of roll-over relief so that all assets normally available for reinvestment will be considered?
The simple answer is that we shall keep the matter, as we generally do, under careful and constant review.
It is not correct to say that we are limiting the range of reliefs available when pre-commencement assets are sold, nor that the proposals are in this respect unfair to companies, nor that they do not adequately take into account their expectations with regard to existing assets. The hon. Member for Arundel and South Downs suggested that there was an element of retrospection in the provision. I do not accept that argument, and would point out that the consultation on the changes began in March 1998, so the proposals have been in the pipeline and in the public domain, and have been the subject of detailed discussion with many of the representative bodies and interests in the field, for a considerable time.
As stated in the background information, the estimated cost of the provisions to the Exchequer is some £200 million, rising in due course to £350 million. I submit that schedule 29 and the clause that it supports represent—by anyone's standards—a generous set of proposals that has been developed in the light of extensive consultation. Finding the right balance between the benefits to be enjoyed by companies from the new relief and their expectations with regard to future disposals of their existing assets has been an important element in the consultation.
The proposals represent a balanced package at an affordable, but not insignificant, cost to the Exchequer. The package is both competitive and fair, because it provides relief for all expenditure on intangibles; fair taxation of sale profits; and roll-over relief to ensure that companies have an incentive to reinvest in further intangible assets.
The amendment proposed by the hon. Member for Arundel and South Downs would make the package even more generous. It would allow a choice of capital gains or intangibles roll-over relief, and would add to the Exchequer cost and alter the balance of the package. To that extent, the amendment goes too far and cannot be right at the moment.
I am grateful to the Economic Secretary, whom I must congratulate on his appointment. Has the Treasury done an exercise as to the cost if the amendment were made?
John Healey: I am grateful for the hon. Gentleman's congratulations. The direct answer is yes, and the cost would be about £50 million. The provisions, which are already generous, cost the Exchequer about £200 million a year, and the amendment would add significantly to that. For the other reasons that I have explained, we cannot support the amendment.
I shall pick up on several of the points put to me by hon. Members during this short debate. The hon. Member for Torridge and West Devon raised a question from the Law Society on what is essentially a minor drafting point. We do not think that it is material. It cropped up in our consideration when preparing the Bill, and the Inland Revenue will monitor matters in case our judgment proves incorrect.
The right hon. Member for Fylde (Mr. Jack) picked me up on my reference to ''very few exceptions'', a phrase that I included because there are indeed very few. He asked for examples. One may be life assurance assets, which are subject to the special insurance tax regime. Research development gives rise to special reliefs, and so falls into a different part of the regime.
I was asked how many businesses might benefit, given the nature and scope of the new regime. The number will build in time under the new rules, but our best estimate is that about 30,000 companies will benefit that would not have done under the previous regime.
On the basis of my remarks, I encourage the hon. Member for Arundel and South Downs to withdraw the amendment. If he is not prepared to do so, I must ask my hon. Friends to reject it.
If I did not make it clear up front, I should say that the reforms in the clause are welcome. A lot of work has gone into them. My understanding of the net cost of honouring the existing position is that it is not as great as £50 million. I have been advised that it is more like £20 million.
Is there any prospect of the deal and approach that the Government have taken being unfairly skewed? Without the amendment, a measure that cost £200 million is a big plus to businesses, but some people will obviously have intangibles from before 1 April 2002 and, in running their businesses, will expect the tax rules to be as they were. It is conceivable that sheltering them on disposal by other intangibles, for whatever reason, may not fit their businesses especially well.
Given the extensive consultation, what response to the issue have the Government encountered? Is the general view that there has not been much skewing and that the deal is acceptable, or have some argued that it is unfair to certain types of business to change the regime in midstream? It is important to know that because rough justice is not necessarily the answer to this sort of problem.
Terms such as ''changing the regime midstream'' and ''rough justice'' are inappropriate, given that we have issued six consultation documents on the matter since 1998. As with other detailed points
of the proposals, individuals and representative organisations have raised questions and made criticisms, but the total package has been widely welcomed as a reform that goes in the right direction and breaks precedent in a way that is modern and helpful to businesses and their professional advisers. The hon. Gentleman would be hard-pushed to find a representative body or individual that would not want that package to be introduced.
I accept that the Institute of Directors and others have welcomed the proposals, that the measure is not new—it has been around for the past four years—and that there was substantial consultation on it. However, I have a philosophical concern that may not affect the schedule or the amendments but may have a longer-term effect.
Until 1997, the income and capital taxes regimes were on one stream, but the new Treasury team introduced a change in philosophy. Capital gains tax, especially for small entrepreneurs, is now at a far lower level. I wonder whether provisions that ensure that intangible fixed assets are put on an income rather than capital basis may mean higher rates of taxation for companies on those assets. I suspect that that is not the Government's intention at this juncture, and we have not received representations on it. However, on the basis that rates of income and capital gains taxes have diverged and that there has been an increase in Treasury meddling, which we may see more of in the future, Opposition Front-Benchers may return to the area of intangible fixed assets when we debate future finance Bills. As the Minister said, it is an important area, and goodwill on this matter is important to large and small companies in a globalised and high-information world.
I want to raise a couple of points about the impact of changes in markets on the tax cost of the measures. Over recent years, telecom and information technology companies have incurred huge losses as a consequence of the write-down in value of assets because the consideration that businesses paid for those companies some years ago is no longer held to be a fair reflection of their market value. What is the implication of future write-downs on the tax cost set out in the Red Book? If a company such as Vodafone wrote off £0.8 billion of the value of assets acquired from Mannesmann, the transaction would not be covered by the schedule, but if future transactions of a similar magnitude incurred a similar write-down, that might give rise to some variations in the revenue.
In its representation, the Institute of Directors welcomed the new regime in general but went on to say:
''the great extent of legislation suggests that the plot, of simply following the accounts, has been somewhat lost.''
The Bill and the explanatory notes are somewhat longer than FRS 10, on which the measure is meant to be based.
The hon. Member for Fareham (Mr. Hoban) raises an important point, of which we are all conscious in the light of our experiences of such large
corporate problems. The massive goodwill write-offs that have followed some major takeovers have generally involved the acquisition of shares in the target company, rather than direct purchase of the assets. For clarification, the new relief would not apply in such cases. We are keen to encourage reinvestment in assets and the relief will be available only for new acquisitions, not for write-downs of assets that companies have previously acquired.
I am grateful for the Minister's important clarification of the matter. I suspect that in transactions there will be some tension between vendors and purchasers: vendors will be interested in the substantial shareholdings rules and the benefits that they bring; and purchasers will increasingly want to use asset-based transactions to crystallise the goodwill in the transaction and benefit from the tax relief that that brings when the goodwill asset is amortised over however many years. They will also want to catch any major write-downs that may occur in the future if they believe that the value of the business that they have acquired has diminished.
I suspect that we shall return in fuller detail to that issue when we discuss a later amendment.
I welcome and accept the general support offered by the hon. Member for Cities of London and Westminster (Mr. Field) for the reform proposals in the Bill. Perhaps he will allow me to take his specific points as fair warning—if we are fortunate enough to serve on a future Finance Bill together.
Although the area is very technical, the debate has usefully aired it. I repeat that, overall, the measures are welcome. I remain uncomfortable that some businesses may suffer as a result of what is intended to be, and is accepted as, a positive measure. Our amendment will not be accepted and is not sufficiently material to put to a vote, but I hope that the Government will examine the matter further to find out whether there might be any significant wobbly areas. Nobody would want changes to our tax system to have a material and effectively retrospective impact on previous decisions. That point is different from the one that I made yesterday about retrospective measures. If a business has done a major deal based on current tax rules, there is an expectation in our traditions that it will get grandfathered. That principle should therefore be followed as far as possible. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I have deliberately permitted a fairly wide-ranging debate on the amendments because the issues are complex and interrelated. Also, the Committee did not have a clause stand part debate on clause 83, so it seemed right for the Minister to have the opportunity to range slightly wider in putting his case than the amendments would otherwise have allowed. That being so, I shall tell the Committee now that, although I am prepared to allow a more wide-ranging debate where matters are interrelated, I shall take that into account when considering whether to allow a stand part debate.
Mr. Flight: I beg to move amendment No. 184, in page 405, line 44, at end insert—
'71A (1) This paragraph makes provision for the application of this Schedule where a controlling interest is acquired in a company (the first company) by another company (the second company), such that the first company becomes a member of a group of companies of which the second company—
(a) was already a member; or
(b) is or becomes the principal company.
(2) Immediately before the time when the second company acquires a controlling interest in the first company, where the first company owns intangible fixed assets, the first company shall immediately before that time be deemed to have disposed of those intangible fixed assets for a sum equal to such amount as shall result in neither a gain nor loss for capital gains tax purposes nor a credit or debit for the purposes of this Schedule as the case may be.
(3) Immediately after the time when the second company acquires a controlling interest in the first company, such part of the expenditure (the apportioned expenditure) by the second company on the acquisition of a controlling interest in the first company shall be treated as expenditure on acquiring the intangible fixed assets of the first company, as shall be just and reasonable. The tax written down value of the intangible fixed assets of the first company shall be deemed to be equal to the expenditure so apportioned.
(4) The third person is a company or other person from whom the second company acquired the controlling interest in the first company. Where this paragraph applies—
(a) the third person shall be deemed to have disposed of an intangible fixed asset for a sum equal to the expenditure deemed to have been incurred by the second company pursuant to sub-paragraph (3) above;
(b) the disposal by the third person of the intangible fixed asset pursuant to this sub-paragraph shall be deemed to be a separate asset from the shares in the first company; and
(c) any chargeable gain that accrues to the third person as a result of the disposal of the shares in the first company shall be treated for all the purposes of the Tax Acts as reduced by an amount equal to the expenditure deemed to have been incurred by the second company pursuant to sub-paragraph (3) above (and an allowable loss will be deemed to be increased by a like amount, as the case may be).
(5) The intangible fixed asset deemed to have been disposed of by the third person for the purposes of sub-paragraph (4) above shall be treated as having been created or acquired (as the case may be) at the time that the intangible fixed asset owned by the first company was acquired or created by the first company.
(6) In sub-paragraph (2), (3) and (5) above, references to the first company shall include references to one or more companies that were not in the same group as the second company before its acquisition of a controlling interest in the first company but as a result of that acquisition are in the same group as the second company after the acquisition.
(7) For the purposes of this paragraph, the second company acquires a controlling interest in the first company if the two companies are not in the same group and there is an acquisition by the second company of shares in the first company such that those two companies are in the same group immediately after the acquisition.
(8) This paragraph shall apply only if an election in writing is made jointly by the second company and the third person, such election to be made within the period commencing with the acquisition of the controlling interest in the first company and ending two years later.'.
The amendment picks up the issue that my hon. Friend the Member for Fareham has already raised. It is aimed at resolving the anomaly where the acquisition of assets results in a materially better tax result for the acquirer than if they had acquired the shares of the company carrying on the trade. Under the current provisions, where a company acquires a business from another person, the goodwill becomes
purchased goodwill, as defined under generally accepted UK accounting practice, and hence may be tax depreciated, but if a company acquires the shares of a company carrying on a trade, as the Minister commented, the goodwill may not be amortised.
Clause 44 contains measures that operate in the entirely opposite direction, which make it much more attractive for vendors to dispose of shares than to dispose of assets. My hon. Friend the Member for Fareham referred to tension, but I see potentially more than that. The proposals may encourage complex schemes for deals that would put money into clever corporate financiers' pockets, and we do not want to create such complexity. I was unhappy to hear the Minister say earlier that the measure was intended to apply only to assets, not to shares. I take that to be the Government's position, and if their position is unchangeable, measures that are otherwise positive may bring with them many problems.
As the hon. Member for Fareham mentioned during our discussion on the previous set of amendments and as the hon. Member for Arundel and South Downs explained, there is a perceived tension in the Bill between the intangible assets reform and provisions in clause 43 on the exemption for substantial shareholdings. The amendment addresses that perceived tension with a provision that appears to be based on section 338 of the United States internal revenue code. This is not a new issue. We raised it during the consultation process, we considered it carefully when drafting the Bill and we shall keep the matter under review, as I explained to the right hon. Member for Fylde.
Both the intangibles and the substantial shareholdings reforms were developed following extensive consultation with business. In each case, the final outcome has been welcomed by business. Both reforms address what are, by anyone's standards, long-standing problems in the corporate tax system, which needed to be overhauled. At the asset tier, the new intangibles regime modernises the corporation tax base and removes the distortion against acquiring intangible assets. At the shareholder tier, the substantial shareholdings exemption removes a major obstacle to commercial restructuring.
We have included in schedule 29 a measure that will extend the intangibles roll-over relief to cases where a company reinvests by acquiring a controlling interest in another company and that newly acquired company has intangible assets within the regime. I hope that the Committee appreciates that this innovative rule will provide for a greater degree of neutrality between acquisitions in share and asset form, and that it will afford greater flexibility to companies as the number of assets within the new regime increases.
All in all, the reforms provide a sensible framework at shareholder and asset tiers that will enhance the competitiveness and flexibility of the UK corporate tax system. However, we understand the points that have been made about it. As I said earlier, we shall keep the matter under review. As we monitor the
impact of the new regime in its first few years of operation, we shall consider the case for a further measure along the lines of the United States section 338 model should the evidence warrant it. However, I warn those hon. Members who may wish to press the point now or on Report that a range of factors will need to be taken into account.
The potential cost would need to be considered carefully. An elective provision of this sort, which would generally be used by companies only when there was an overall tax benefit to them, would be likely to carry a significant Exchequer cost. The amendment would increase that cost, as it appears to bring existing intangible assets within the new regime while they remain in the hands of the company that held them prior to commencement. Under the schedule, those assets are outside the regime until they actually change hands.
It is by no means clear that the proposed new paragraph would work satisfactorily in practice. I shall not go into the technical detail here; it will be more appropriate to do it in consultation with experts. However, it is a technically complex area and legislation along such lines would need to be developed in consultation with business to ensure that it achieved the objectives that we might wish for potential provisions of that nature. The amendment would also allow intangible assets to be treated as bought and sold under the election, but no other assets. It is hard to see why that should be so. The US equivalent rule applies to all assets, not only intangibles.
I assure Opposition Members that we will continue to keep the matter under review. We shall assess the impact of the reforms introduced in the Bill, and we shall consult business on future reforms to corporation tax. I would therefore encourage the hon. Member for Arundel and South Downs to withdraw the amendment.
I am glad to hear the Minister saying that the Government accept the tension, and that they are willing to keep the matter under review and consider following the US section 338 model. As the new economy sector recovers over the next few years, intangibles will be more important than ever. I am sure that the Revenue will keep a beady eye out for new schemes that try to marry the two conflicts—of buyers wanting to buy assets and sellers wanting to sell shares. The problem may be solved; otherwise, it may be an indication that it is time to make a change. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
I beg to move amendment No. 197, in page 433, line 18, leave out from 'acquisition' to end of line 19.
The amendment is about the rules for bringing Lloyd's syndicate capacity within the new intangible property regime. Paragraph 128 of the schedule applies the new intangible property regime to existing syndicate capacity at Lloyd's—that is, the right that a corporate member of Lloyd's has to underwrite in syndicate. Syndicate capacity is already dealt with under an income regime for corporation tax purposes.
It therefore makes sense immediately to bring existing capacity into the new rules. Lloyd's made representations to that effect during the consultation and is satisfied with what has been agreed.
The amendment concerns paragraph 128(4), on which the Treasury's explanatory note states:
''Paragraph 128(4) ensures that reinvestment relief under Part 7 is not prohibited on the realisation of existing capacity by virtue of the requirement in paragraph 38(1)(a) that the asset may have been a 'chargeable intangible asset' throughout the period it is held.''
That is covered by the decision, which is to be supported, to bring existing capacity within the new rules. A corporate member of Lloyd's who acquired a syndicate capacity in 1998 and realised in 2003 would be able to qualify for full reinvestment, provided they met the reinvestment requirements.
The wording of paragraph 128(4) seems not to achieve the result stated in the Treasury's note. It states:
''For the purposes of Part 7 (roll-over relief on realisation and reinvestment) the asset shall be treated as if it had been a chargeable asset from the time of its acquisition or, if later, the beginning of the first accounting period to which this Schedule applies in relation to it.''
That would surely mean that the capacity would be treated as having been acquired in 1998, when it was acquired, or if it were acquired later it would be considered to have been acquired on 1 January 2002. A significant period of ownership would therefore not qualify for reinvestment relief. That seems to be the opposite of the Government's intention, and if that is so it surely needs correcting, which is what the amendment is designed to do.
The wording of paragraph 128(4) continues to baffle the tax lawyers advising Lloyd's, who remain convinced that it states the opposite of what is both intended and in the Treasury notes. I hope that the Economic Secretary can place something on the record to make the wording mean what the Government intend it to mean.
As the hon. Gentleman has explained, the amendment's purpose is to ensure that roll-over relief is not restricted in the case of an intangible asset that is a syndicate capacity at Lloyd's. He is right to say that the provision in question is intended to ensure that there is no such restriction. Even I can see that the wording of the paragraph may not be as clear as it ideally might be. Leaving aside interesting syntactical arguments over the precise meaning of the words in paragraph 128(4), although Lloyd's regards it as baffling there is only one way in which it could be interpreted. The provision will ensure that relief is not restricted, which is precisely the result that the hon. Gentleman is seeking.
On that basis, the amendment is not needed. The hon. Gentleman asked me to confirm that on the record, and I am happy to do so. I assure the Committee that the provision can, and will, be construed to ensure that there is no restriction on roll-over relief in those circumstances. I have listened carefully to what the hon. Gentleman has said and I have to concede that there is some merit in the amendment, which some would regard as belt and
braces. Nevertheless, I should like to give the matter further thought, not least because a similar issue arises in relation to paragraph 127(3).
If necessary, the Government will table amendments to both provisions on Report. With that assurance and the confirmation that I placed on the record, I ask the hon. Gentleman to withdraw the amendment.
I thank the Economic Secretary for his helpful comments. I look forward to the matter being sorted out one way or t'other. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment proposed: No. 212, in page 438, line 19, leave out 'group relief' and insert 'relief against total profits'.—[John Healey.]
I am now in a state of disorganisation and not certain whether the amendment to which you have just referred, Mr. Gale, is that which I wish to talk about. I stood up originally to raise something under a stand part debate on schedule 29. Which amendment are we referring to?
I do not wish to oppose those amendments, but I should like the opportunity to raise another issue under schedule 29.
Amendment agreed to.
Amendment made: No. 213, in page 439, line 3, at end insert—
'existing asset paragraph 118(3)'.—[John Healey.]
Question proposed, That this schedule, as amended, be the Twenty-ninth schedule to the Bill.
I thank you, Mr. Gale, and I apologise.
Although I have not tabled an amendment on the issue, I want to mention the insurance industry's position. We have already dealt with the position of Lloyd's, and I want to deal with the major reform introduced by clause 83 and schedule 29, which provides tax relief for purchasing goodwill and other intangible assets. The insurance industry's concern is that, although insurance companies writing life assurance business are within the regime in which they purchase royalties and computer software, they are not benefiting and will not benefit from the goodwill reform. Paragraph 78(1) excludes intangible fixed assets held for the purpose of life insurance business. The reason why that is the case is a fundamental question. Surely, if a life insurance company purchases goodwill, it should be treated as any other company.
I suspect that the Government's argument for exclusion will be that the special method of taxation for life insurance companies, known as the IE system—income minus expenditure—is primarily a charge on policyholders' investments, and that goodwill relief is a matter for shareholders. It may be accepted that the new regime needs to be adapted so that it applies appropriately to the IE system, but surely goodwill held by shareholders outside the insurance companies' long-term business fund should in principle be entitled to the relief available to most other corporate taxpayers.
The Government's decision not to allow relief for goodwill purchased by insurers writing life assurance business, and held outside the long-term business fund, contrasts with their acceptance of the principle elsewhere in the Bill of the exemption from tax of capital gains on substantial shareholdings. Elsewhere, shares held by a life insurance company outside the long-term business fund qualify for relief, just as the shares of any other company would.
What is the logic on which the particularly narrow category of outside assets of the insurance industry has been excluded? Do the Government have the matter under consideration, and are they likely to include it, according to the logic of what they have done in other parts of the Bill?
I should like to raise a small point of clarification with the Economic Secretary. Paragraph 56 is headed:
''Roll-over relief on reinvestment: application to group member''.
The Law Society has brought to my attention the fact that it is not clear from paragraph 56(2)(b) whether the disposing company still needs to be a member of the group when the expenditure on other assets is incurred. It should not be necessary for the disposing company to remain a member of the group and I look forward to hearing the Government's view on that from the Economic Secretary. If there is doubt, I hope that an appropriate amendment can be tabled on Report so that the model contained in section 175(2A) of the Taxation of Chargeable Gains Act 1992 can be followed in such circumstances. It is not wise to have the inflexibility that could be construed as being part of this provision and I hope that the Economic Secretary will give us his interpretation of the provision, and tell us whether he believes that the more benign construction is more appropriate and, if there is any doubt, that an amendment will be tabled on Report.
I want to make a brief probing point and I apologise to the Economic Secretary if he covered it in his earlier comments when I had to slip down the Corridor to a Select Committee.
The Economic Secretary will be aware that in the telecommunications and media sectors there have recently been some substantial write-downs of intangible assets following, for example, the Vodafone acquisition of Mannesmann. What would be the tax implications for substantial write-downs and future potential write-downs of 3G licences?
John Healey: Perhaps I may take those points in reverse order and deal first with that raised by the hon. Gentleman. I understand the tension between Select and Standing Committees, having experienced that myself. I refer him to the Official Report because substantial write-downs were dealt with earlier in our discussion. If he feels that I did not respond adequately to his hon. Friend the Member for Fareham, I encourage him to tackle me again.
The hon. Member for Torridge and West Devon asked about group roll-over provisions. My advice is that the rules already have the effect that he wants, so it is unnecessary for the measure to be amended.
On the specific concerns raised by the hon. Member for Arundel and South Downs about the life assurance industry, he will not be surprised to know that the Association of British Insurers has already raised the matter with the Revenue. I shall try to give an explanation of the provisions as they stand and then some encouragement and an assurance that significant consideration is being given to such matters.
The hon. Gentleman asks why a life company does not receive any relief for write-down of its goodwill under the schedule. There are two reasons. The way in which we tax life assurance companies on the income accruing for policyholders means that it would not be appropriate to allow write-down of goodwill against policyholders' income. Goodwill relates entirely to the shareholders. The ABI accepts that as a reasonable argument and I believe that the hon. Gentleman acknowledged it. As a rule, goodwill is only ever acquired by a life company for payment if there is what the schedule calls a tax-neutral transfer. That means that goodwill would never become an asset subject to the schedule.
However, the ABI believes that there may be cases in which goodwill is purchased from unconnected parties and is not held in the life company's long-term business fund, which is the point that the hon. Gentleman made. The ABI argues, as he did, that in such a case relief should be given. I am not persuaded that the case for giving relief in such circumstances is strong enough. It is certainly not right for relief of that type of goodwill to be set against policyholders' income, and the existing capital gains reliefs, like indexation and roll-over, remain available for it.
Let me also say that rules for life assurance taxation will not be static during the next few years. In the Budget, my right hon. Friend the Chancellor announced that consultation on reforms to corporation tax would start later this summer. Clearly, such reforms will include life assurance company taxation. Changes are also likely because of developments elsewhere, such as the Financial Services Authority's review of regulatory reporting requirements, which are used for tax purposes.
The hon. Gentleman asked for confirmation that the matters that he raised are under consideration. I hope that my explanation suggests that that is the case. I assure him that the treatment of goodwill will be kept fully in mind when considering any possible future changes.
Finally, as this is a clause stand part debate, I conclude by saying that I welcome the broad support of the Committee for the new provision, which puts in place a comprehensive regime that will provide consistent treatment of a company's expenditure and receipts in respect of intangible assets. The new regime replaces what I described previously as an outdated, incoherent accretion of rules based on previous judicial decisions and occasional legislation stretching back for more than 150 years. It is a significant further step in the Government's programme of corporate tax reform. The measure has been subject to extensive consultation, which has produced a better set of provisions. The end result is that the reform has been widely welcomed outside the House, and I hope that it will also be supported by the Committee.
I agree with the Economic Secretary that the reforms are broadly welcomed and again express appreciation for all the work that the Inland Revenue has done in addressing difficult issues.
On the specific insurance point that I raised, I was pleased to hear the Economic Secretary's comments. Materiality is the crucial issue. If the Government were to perceive a material aspect, they would probably see the justice of the argument. However, overall, the measures are very welcome.
The provisions are welcome, and I am grateful for the Economic Secretary's assurance on degrouping. So that it is absolutely clear for the record, is it the Government's view and intention that it should not be necessary for the disposing company to remain a member of the group when the expenditure on other assets is incurred? That is my understanding of what the Economic Secretary said.