Clause 161 - Deferred unascertainable Consideration: election for treatment of loss

Finance Bill – in a Public Bill Committee at 10:15 am on 17th June 2003.

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Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury 10:15 am, 17th June 2003

I beg to move amendment No. 249, in

clause 161, page 100, line 18, after 'assessment', insert

'or accounting period as defined by the Corporation Tax Acts.

(8A) This section shall apply in computing the allowable losses accruing after 9th April 2003 to a company within the charge to corporation tax.'.

Having rapidly moved through clause 160, to help the Committee I should point out that I suspect that it will be detained over clause 162 and schedule 29.

Clause 161 deals with deferred unascertainable consideration and the election for treatment of loss. The Law Society of England and Wales has said that it generally welcomes the introduction of the relief to deal with the situation in which an asset is sold in exchange for a future right, which is treated as a separate asset for capital gains purposes, although in reality it comprises a second tranche of consideration for the original asset. That is the problem raised by the case of Marren v. Ingles. The clause ensures that any loss arising on that second asset can be utilised against any gain on the original asset, but the relief offered is more limited than that which the Law Society sought in the previous law reform memorandum or in discussions with the CGT review group. The Law Society understands that some aspects of what it has sought, such as aligning the taper relief status of the second asset with the original one and allowing the tax payments to match the receipts of cash, have been rejected as not being broadly cost neutral. However, it urges—which is why I am raising the matter—that those be borne in mind in any future, more general review.

This clause should ensure that losses suffered by companies as a consequence of the decision in Marren v. Ingles should be relieved in the same way as losses accruing to individuals. It is right in principle that companies, so long as they are taxed on chargeable gains computed similarly to those accruing to individuals, should be given relief for losses similar to that applying to individuals. It is not right that companies' gains in previous years, to the extent that they arise from the Marren v. Ingles rule, should not be eligible for an equivalent loss carry-back if less is realised from the second asset in due course than the value originally attributed to it.

That is the purpose of the amendment. It is not only put forward by the Law Society, but supported by the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales. I shall deal with the subsequent amendments separately.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 10:30 am, 17th June 2003

The purpose of the clause is to make life easier for people selling, for example, a business or land in some cases where all or part of the proceeds are to come in a later year and where the amount of those later proceeds cannot be worked out at the outset. Those people will be able to sell with the confidence that they will not later have losses that they cannot use. That means that valuing the disposal proceeds for the business or land will be less fraught.

Under the clause, a taxpayer may elect to carry losses arising on rights to deferred unascertainable consideration back to years when a taxable gain was made on the disposal of the original asset. Taxpayers must be within charge to capital gains tax. Individuals and trusts can thus benefit from a change, but companies within the charge to corporation tax cannot.

I understand the sentiment behind amendment No. 249, but I shall ask the Committee to reject it should it be pressed to a vote. I shall explain why I think that there is a more appropriate route for considering the issues. The clause addresses a specific problem raised in consultations with representative bodies, which is that some individuals might make a loss on the disposal of certain rights with no prospect of tax relief for that loss. The clause allows people who sell assets wholly or partly for that type of right to settle their capital gains tax liability on the sale, with an assurance that should things turn out worse than expected, there is the possibility of tax relief for a loss on the right. It offers practical help to people in such circumstances.

Companies are different. I appreciate that companies make deals where the consideration is wholly or partly in the form of one of those rights to deferred unascertainable consideration, but the tax rules for companies' capital profits are different from those for individuals, for example, where the rules for taxing loan relationships or intellectual property rights apply. The rules for allowing company losses also differ, for example, where a company is a member of a group.

We would have to consider the effects of those differences in practice before we could be sure that it

would be right for companies to have a similar tax treatment for losses on rights to deferred unascertainable consideration. The appropriate context for considering the tax treatment of capital gains and losses of companies, including how rights to unascertainable considerations are taxed, is the continuing consultation on the reform of corporation tax. The tax treatment of capital assets is an important strand of the overall reform programme, which is intended to respond to the changing business environment by reducing distortions and developing a modern, coherent and competitive tax system for companies.

A second consultation document on corporation tax reform will be published in the summer. If the amendment were accepted, companies might have to face two changes to the law on their rights in a relatively short period of time. Therefore, against the background of continuing consultation, it will be better for companies if we take forward an integrated and coherent reform of the tax regime, including the rules for capital assets. Extending clause 161 to companies would be, at best, a piecemeal change that may be no more than a temporary complication benefiting only a few companies in the short time that it lasted before a further change was made.

I appreciate the hon. Gentleman's point, but I hope that he will consider withdrawing the amendment so that people get a chance to make representations in the corporation tax reform consultation in the summer on the rights that are the subject of the clause. In that way, we can take forward the continuing reform of corporation tax in the context of a coherent and co-ordinated approach on which we have had time to consult business. However, if the hon. Gentleman is unable to withdraw the amendment, I shall ask my hon. Friends to oppose it, should it be pressed to a vote.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

On the basis of the Paymaster General's helpful and constructive comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

I beg to move amendment No. 250, in

clause 161, page 104, line 5, after 'losses', insert

'but more than one notice satisfying the requirements of this section may be contained in a single document'.

The amendment would add a practical simplification. It is understandable that the consequences should be set out separately for different losses, as stated in proposed new subsection 279D(10), but it seems unnecessarily restrictive to preclude the details being provided in a single document, which would invalidate the claim for both losses.

The Law Society has helped with the suggestion that the provision be amended to provide that more than one notice satisfying the requirements of the section may be contained in a single document. The Chartered Institute of Taxation and the Institute of Chartered Accountants have also made similar representations. I look forward to hearing what the Paymaster General has to say.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Amendment No. 250 is intended to make things a little easier for people who want to make two or more elections at the same time under clause 161. I fully support the sentiment behind the amendment, but I hope to show that it is not needed to achieve our common aim.

If a person incurs two or more losses and elects to carry them back to earlier tax years, clause 161 requires separate notices for each loss. The reason for the requirement is simple: it ensures that information about one loss is given separately from information about any other loss.

However, the requirement is only that the notice must be separate from any other notice. That does not mean that a separate letter, posted in its own envelope, must be sent to the Revenue for each loss. I assure the hon. Gentleman that a single letter would be satisfactory if it said, in effect, ''I am making two elections'' and gave all the details in the notice for the first election and then all the details for the second one.

Unfortunately, the amendment would create uncertainty. It casts doubt on current practice for other types of claim and election where similar words are not used. The Government have already made things as easy as possible. I hope that the hon. Gentleman is reassured that it is not our intention to cause duplication or more work. I hope that he is satisfied with my explanation, and is prepared to withdraw the amendment. If he does not, I shall ask my hon. Friends to oppose it.

Photo of Stephen O'Brien Stephen O'Brien Conservative, Eddisbury

I am grateful to the Paymaster General for putting on the record so clearly that she fully supports the sentiment and our common aim that a single document would be perfectly satisfactory provided that it states ''I am making two elections'' or words to that effect. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I have received a request from the hon. Member for Billericay to have a clause stand part debate. As it relates to a matter not covered by the amendments I am happy to grant that.

Question proposed, That the clause stand part of the Bill.

Photo of John Baron John Baron Conservative, Billericay

I wish to raise two quick points with the Paymaster General and I would appreciate her feedback. The change implemented by the clause is welcome—that has been said before—but the provisions are somewhat over-complicated and perhaps unnecessarily restrictive. The clause spans five pages. Would the Paymaster General explain why it would not have been simpler to provide that where a loss arises on a right to honour ascertainable consideration it could be treated as arising in the year in which the right was acquired and carried forward? That would be a much simpler way of approaching the matter without resorting to five pages of provisions.

The restriction of the election to circumstances where a gain has arisen on the original disposal is also unnecessary and could be removed. I shall very briefly give an example for which I am grateful to the Institute

of Chartered Accountants. Mr. A acquires shares in a trading company for £100,000. He sells the shares for £50,000—an earn-out right valued at £40,000. He therefore makes an allowable capital loss of £10,000. He has gains on other assets of £50,000. Two years later the earn-out is calculated and amounts to only £10,000. He therefore realises a loss on the earn-out right of something like £30,000—£40,000 minus £10,000. However, the crucial point is that he has no other gains against which to set the loss. In other words, his real loss on the capital disposal is £40,000 but he has received relief for only £10,000.

The Paymaster General may suggest that that is a theoretical example, but I have been informed that such circumstances have arisen—perhaps not with those exact figures. I would appreciate the Paymaster General's feedback on why the legislation seems somewhat unfair in its treatment of taxpayers in those circumstances.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I am a little perplexed by the hon. Gentleman's assertion that somehow the clause is unfair to taxpayers. The changes were welcomed, and the discussions with representative bodies were based on the question of allowing for a bigger change, which was the subject of the amendments, particularly with regard to companies.

The suggestion is that the effect is too complex, but in many cases it will be simple. There will be just one gain and one loss to consider, and the gain will absorb the whole of the loss. The provisions are inevitably lengthy because they have to take account of all the possible circumstances in which gains and losses may arise. A link must also be established between the loss and the gain on the original asset. The fundamental purpose of the clause is to allow the loss on a right to be set off against gains on the original asset in earlier tax years. Allowing the loss to be set off more widely would break the essential link between the loss and those gains. If the loss cannot be wholly used in that way, then the unused part can be offset against gains on an asset in the year in which the loss arose. Any remaining unused amount will be carried forward and set off against gains in later tax years under the normal rules.

The new carry-back of losses is intended to allow losses to be offset against gains on the original asset, as I have said. It is fair to allow that, because the gain and the later loss on the right to deferred consideration are linked. However, there is no case for allowing the carry-back of a loss on the disposal of a right where there are no gains on the original asset. In those circumstances, there can be no capital gains tax liability in respect of any gain on the original asset, so there is nothing against which the loss should be offset.

Although I am happy to look again at what the hon. Member for Billericay has said, in taxation matters, balances always have to be struck, in the objectives and operation, for the greatest number of taxpayers. I believe that the clause does that, and I commend it to the Committee.

Question put and agreed to.

Clause 161 ordered to stand part of the Bill.