Schedule 37 - Loan relationships: amendments

Finance Bill – in a Public Bill Committee at 3:30 pm on 17th June 2003.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 3:30 pm, 17th June 2003

I beg to move amendment No. 310, in

schedule 37, page 415, leave out lines 1 to 3 and insert—

'(4) The amendments made by this paragraph have effect in relation to loan relationships entered into on or after 9th April 2003'.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 311, in

schedule 37, page 416, leave out lines 43 and 44 and insert—

'(4) The amendments made by this paragraph have effect in relation to relevant discounted securities issued on or after 9th April 2003'.

Amendment No. 322, in

schedule 37, page 417, leave out lines 28 and 29.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

As the Committee will be aware, amendments Nos. 310 and 311 have, in essence, been proposed by the Law Society. Paragraphs 2 and 5 of the schedule could affect private equity and venture capital transactions entered into on the basis of the law as it is. Such transactions are highly dependent on cash flow forecasts, and changes in paragraphs 2 and 5 could impact on the expected cash flows. The amendments would limit the affect of the new rules

to loan relationships entered into after 9 April 2003, to avoid the possibility of a retrospective impact. Amendment 322 seeks, as an alternative route, to remove the retrospective aspects of the schedule, backdating tax changes on the grounds of complexity where Government could not have been expected to have got it entirely right in 1996 and 2002. The equivalent change in clause 178, with the same motive and as set out in the explanatory notes, only takes effect from Budget day. Therefore, would it not be reasonable to knock out the retrospective element in the schedule, too, and allow taxpayers to rely on the Finance Act 2002? The amendment would also give the benefit of some group relief for a short period.

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

I shall ask the Committee to reject amendments Nos. 310, 311 and 322. Amendments Nos. 310 and 311 would preserve the tax benefit of the loophole in the loan relationship legislation for those companies that entered into arrangements designed to exploit it before the Finance Act measure was announced on 9 April.

The loophole has been exploited to create an allowable deduction for interest in circumstances in which the legislation was intended to allow a company an interest deduction only when interest was paid or, as regards a discounted security, a deduction for discount when the security was redeemed. The measure has effect only for interest or discount that accrues on or after 9 April, and it is right that this change should apply to arrangements already in existence when announced. If existing arrangements were allowed to escape, the cost to the Exchequer would amount to tens of million of pounds.

Amendment No. 322 would prevent a Finance Bill measure originally announced on 30 September 2002 from correcting a defect in the loan relationship transitional rules in the Finance Act 2002. The amendment would cost the Exchequer hundreds of millions of pounds by delaying the start date of the original measure, which is intended to have effect for accounting periods beginning on or after 1 October 2002. The effect of the measure is to ensure that under the loan relationship legislation introduced in the Finance Act 2002 companies can continue to carry forward unutilised non-trade loan relationship deficits and correctly offset them against profits for later accounting periods, exactly as allowed under the old regime. It cannot be proper for some companies to benefit from such a loophole at a cost to the Exchequer and, ultimately, to other taxpayers.

As hon. Members know, the Bill has been certified as compatible with the European convention on human rights, so the clause and the schedule comply with human rights requirements. I make no apology for introducing legislation with immediate effect from 9 April 2003, the date on which it was announced. Such action to stop avoidance in its tracks has been standard practice by successive Governments, as I said. For example, provisions with a commencement date of Budget day, 26 November 1996, were ultimately included in the Finance Bill 1997, such as the leasing provision in schedule 12.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I do not question the Paymaster General's right to introduce measures immediately

from Budget day. However, on behalf of the Law Society, which has made representations, I seek clarification as to whether in such cases it would useful, sensible and possible for the Government to release the detail of the clauses on the same day as the Budget, so that there would be greater certainty about the tax situation and people perhaps would not have to telephone the Treasury to establish what the rules are.

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

I am in danger of repeating myself. For the third time, because the issue is anti-avoidance, it is the practice of Governments to announce measures on Budget day, and the clauses are provided in the Finance Bill. The matter is quite straightforward: the obligation on the Government is to ensure that their Budget day announcement on what is to be done is clear. That is what is happening in the present case. I understand that some take the view that the relevant provisions were targeted at the venture capital industry, but they were not. There are already discussions—

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

Could I just finish my sentence? That would be very helpful, thank you.

I have said that there have already been discussions on the Venture Capital Association's views on other aspects of the Bill. However, I can absolutely assure hon. Members that nothing about the measure was not clearly announced in the Budget release. I remain implacably committed to ensuring that anti-avoidance is dealt with swiftly and that the procedures laid down by the Government are followed. The provision in question does that, and I continue to ensure that the Government meet their obligations.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

We are dealing with retrospective taxation, because we are talking about existing loan relationships entered into on or before 9 April. Will the Paymaster General tell us whether those existing loan relationships, which will now be caught, will be taxed in the new way—as it were, the exempt ones—from Budget day this year, or will they be taxed from last year?

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

We dealt at length with retrospection. I shall not go over that ground again this afternoon. On the Government's behalf, I clearly laid out the difference between retrospection and ensuring that those who seek to use legislation in a way that was not intended cannot do so. I characterised the difference by saying that those who play with fire can expect to get their fingers burnt when the Government act.

There is no evidence to suggest that the tax break was critical to the pricing arrangements already entered into before 9 April. It is more likely that the party saw it as an extra bonus at the expense of the Treasury, and it would be unfair to allow this unjustified tax advantage to continue for a few at the expense of taxpayers in general. The measure affects only transactions that occur on or after, or amounts accruing in periods following, 9 April 2003—the date of the announcement. I commend the schedule to the Committee and recommend that my hon. Friends oppose the amendment.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

We will not press the matter to a vote. We are short of time, and to do so would be a waste of time. The Government would be wise to listen carefully to the venture capital industry, and I am glad that the Paymaster General acknowledged their concerns. She may find that the Law Society proposals in particular, as represented by amendments Nos. 310 and 311, are a better alternative to the possibility of some venture capital deals failing where the costs are not that great.

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

I am sure that the hon. Gentleman will accept that the arrangement gives certainty to the vast majority of venture capital funds that the rule restricting relief for late paid interest does not apply to investments that they make.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I thank the Paymaster General for putting that statement on the record. It will be appreciated.

I shall not enter into the retrospection argument, but I am still concerned that the Paymaster General will rightly consider matters from the Government's perspective, but the other perspective, especially of business circumstances, will be different. It will be: ''These are the arrangements. If the Government drafting got it wrong last time, hard luck.'' It is not always correct to use the language that the Paymaster General uses in that context. However, we have made our points. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I beg to move amendment No. 323, in

schedule 37, page 417, line 29, at end add—

'PART 3 OTHER AMENDMENTS

Definition of collective investment scheme

(1) The Finance Act 1996 is amended as follows.

(2) In section 103, in subsection (1) insert in the appropriate place:

''collective investment scheme'' means any arrangements which amount to a collective investment scheme for the purposes of section 235 Financial Services and Markets Act 2000 or any arrangements which would amount to a collective investment scheme for the purposes of that section but for being arrangements falling within paragraph 21 of the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) as amended.

(3) In each of the following provisions, after the words ''collective investment scheme'', delete the words ''within the meaning of section 235 of the Financial Services and Markets Act 2000'';

section 87(5A);

section 87A(3);

paragraph 2(1B) of Schedule 9;

paragraph 18(1)(c) of Schedule 9;

paragraph 20(5) of Schedule 9;

paragraph 20(6) of Schedule 9'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

The amendment is designed to put investee companies that are venture capital limited partnerships, which happen to be bodies corporate, in the same position as investee companies that are limited liability partnerships established under English law. Many people viewed the press release announcing schedule 37 as obscure, as my hon. Friend the Member for Huntingdon (Mr. Djanogly) said. There were

complaints, for better or worse, that it was not clearly understandable, especially in the venture capital industry. Under the Finance Act 2002, venture capital limited partnerships were not covered by the definition of collective investment schemes—for example, if they were established in the United States—and were excluded from the general arrangements. They benefited from the legislation only in obtaining some certainty of tax treatment of loans made to UK investee companies by making loans to a subsidiary of the company in which they held shares. Paragraphs 2 and 5 of schedule 37 close that arrangement. The amendment is therefore aimed at putting investee companies of VC partnerships that happen to be bodies corporate under the Finance Act—as it will be—in the same position as investee companies of limited partnerships established here in the UK. Surely, it cannot be wise to discourage US-based venture capital investment in the UK by putting them into a tax-disadvantaged position. The amendment also contains other measures that seek to address similar discrimination in other parts of the Finance Act 1997.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 3:45 pm, 17th June 2003

I ask the Committee to reject amendment No. 323, which creates, for the purposes of loan relationship legislation, a new and potentially very wide definition of a collective investment scheme. The amendment primarily relates to the loan relationship avoidance measure that has already been discussed in the context of previous amendments. An exception already exists to that avoidance rule for limited partnerships that are also collective investment schemes within the definition of the Financial Services and Markets Act 2000. That exception was agreed with the British Venture Capital Association, in discussion with the Revenue, leading up to the changes to loan relationship rules introduced in the Finance Act 2002.

The Finance Bill measure has exposed a degree of uncertainty among some venture capital funds. In some cases of foreign limited partnerships, funds are unsure whether the Revenue will apply an overly narrow interpretation of the definition of collective investment schemes. The Revenue is already in discussions with the BVCA, with a view to resolving the problem through revised guidance.

More generally, the amendment goes much further than I consider reasonable in moving away from the more targeted Financial Services and Markets Act 2000 definition of a collective investment scheme. It creates a very wide definition, which would have the effect of treating most, if not all foreign limited partnerships as though they were collective investment schemes. It will take some time to consider all the possible implications of such a definition, and the consequent risk to the Exchequer. There is real concern that the amendment could lead to tax leakage. I hope that the hon. Gentleman will withdraw his amendment, but if he wishes to put it to a vote, I will ask my hon. Friends to oppose it, for the reasons that I have expressed.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I think that I was comfortable with what the Paymaster General said. However, she did not say

that it is the Government's intention that investee companies that are venture capital limited partners and bodies corporate will be put in the same position under loan relationship tax law as investee companies and limited partnerships established under UK law. That position is unclear. The point at the bottom of the heap is simple. Are they to be treated in the same way under the Government's measures?

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

As I explained, we are in discussions with the British Venture Capital Association. I need to see how those discussions go. It would be quite inappropriate for me to give a blanket undertaking of such a wide-ranging commitment. Where the BCVA believes that there is uncertainty, discussions on revised guidance will take place. I think that that is the best way to proceed.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I accept that that is the best way to proceed. However, there is a very simple point to be made. It is not in the interests of the economy to give tax-privileged positions to domestic limited liability partnerships, at the expense of US ones. If we wish to attract their business, the tax rules should be broadly the same.

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

The relief is available for any kind of limited partnership that is a collective investment fund as defined in section 235 of the Financial Services and Markets Act 2000. The use of that definition to determine who qualified for the relief was agreed between the Inland Revenue and the venture capital industry during the consultation process on the reforms introduced in the Finance Act 2002. I cannot see why that does not satisfy the hon. Gentleman.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Yes, but times move on. That was agreed because that there was another mechanism, which I described a few minutes ago, involving a subsidiary company, by which foreign corporate limited partnerships achieved parity with UK limited partnerships. Parity worked by a different mechanism. I repeat that there is no commercial logic, or economic self-interest logic, in having foreign bodies that happen to have a slightly different legal structure placed at an advantage in comparison with domestic bodies. The Paymaster General said that discussions are proceeding. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 37 agreed to.

Clause 178 ordered to stand part of the Bill.