Schedule 38 - Sale and repurchase of securities etc

Finance Bill – in a Public Bill Committee at 4:00 pm on 17th June 2003.

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Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 4:00 pm, 17th June 2003

I beg to move amendment No. 300, in

schedule 38, page 419, line 42, at end insert—

9A In section 730A of the Taxes Act 1988 (treatment of price differential on sale and repurchase of securities), after subsection (8) insert—

''(8A) In this section references to the sale price are to be construed—

(a) in a case where the securities are bought back by the transferor or a person connected with him in compliance with a requirement imposed in consequence of the exercise of an

option acquired under the agreement to sell the securities or any related agreement, as references to what would otherwise be the sale price plus the amount of any consideration given for the option, and

(b) in a case where the securities are so bought back in the exercise of an option so acquired, as references to what would otherwise be the sale price less the amount of any consideration so given,

unless the consideration is brought into account under Schedule 26 to the Finance Act 2002 (derivative contracts).''.'.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Government amendments Nos. 301 and 302.

Amendment No. 308, in

schedule 38, page 422, leave out lines 29 to 39 and insert—

'(2A) Where—

(a) a company has a relationship to which section 730BB of the Taxes Act 1988 applies (exchange gains and losses on sale and repurchase of securities), and

(b) the circumstances mentioned in subsection (1)(a) of that section are such that a money debt arises from the obligation mentioned in section 730A(1)(b)(i) of that Act or from the exercise of an option mentioned in section 730A(1)(b)(i) or (ii) of that Act,

the company shall not be regarded for the purposes of the Corporation Tax Acts as having, by reason of that money debt, a relationship to which this section applies, so far as relating to exchange gains and losses.'.

Government amendment No. 303.

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

This set of technical Government amendments to the proposed tax changes for sale and repurchase agreements—repos for short—introduced by the Finance Bill clarify the tax treatment of option premiums in a repo, and they deal with two possible instances where there might otherwise be a double charge to tax or a double deduction arising from repos. Forgive me for saying so, but amendment No. 308 duplicates the effect of Government amendment No. 303. I thank the hon. Member for Arundel and South Downs for spotting that; I therefore invite him not to press his amendment, but to share in the reflected glory of the Government amendments.

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

I am delighted to have confirmation that amendment No. 303 deals with the problem raised by the Law Society in amendment No. 308; it will save my having to explain what the amendment was about.

Amendment agreed to.

Amendments made: No. 301, in

schedule 38, page 420, line 1, at end insert—

'9B (1) Section 730A of the Taxes Act 1988 (treatment of price differential on sale and repurchase of securities) is amended as follows.

(2) In subsection (4) (adjustment of repurchase price) for ''this section and sections 737A and 737C'' substitute ''the excepted provisions specified in subsection (4A) below''.

(3) At the end of that subsection add as a second sentence—

''This subsection is subject to subsection (4B) below.''.

(4) After that subsection insert—

''(4A) The excepted provisions are—

(a) this section,

(b) section 730BB, apart from subsection (6A),

(c) section 737A, and

(d) section 737C.

(4B) Where section 730BB(6A) has effect (repurchase price to be treated as increased or reduced for certain purposes), subsection (4) above does not have effect for any purpose other than that of determining the amount that falls to be increased or reduced under section 730BB(6A).''.'.

No. 302, in

schedule 38, page 421, line 29, at end insert—

'(6A) Where a company has a relationship to which this section applies, the repurchase price shall be treated for the purposes of the Tax Acts (other than this section and sections 730A, 737A and 737C) and (in cases where section 263A of the 1992 Act does not apply) for the purposes of the 1992 Act—

(a) in a case where an exchange gain arises to the company by virtue of subsection (4)(a) above or an exchange loss arises to the company by virtue of subsection (5)(b) above, as increased by the amount by which the first sum exceeds the second sum, and

(b) in a case where an exchange gain arises to the company by virtue of subsection (4)(b) above or an exchange loss arises to the company by virtue of subsection (5)(a) above, as reduced by the amount by which the second sum exceeds the first sum.'.

No. 303, in

schedule 38, page 422, line 32, leave out from 'securities),' to the end of line 35 and insert—

'(b) in the case of that relationship the circumstances mentioned in section 730A(1)(b) of that Act are such as to give rise to a money debt, and

(c) the company stands, or has stood, in the position of a creditor or debtor as respects that money debt,'.—[Dawn Primarolo.]

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

I beg to move amendment No. 309, in

schedule 38, page 423, line 18, at end insert—

'17A In Schedule 26 to the Finance Act 2002 after paragraph 4, insert—

''Contracts excluded by virtue of forming part of sale and repurchase agreement

4A A relevant contract is not a derivative contract for the purposes of this Schedule if it forms part of an arrangement falling within section 730A of the Taxes Act 1988.''.'.

I hope that the Government amendment No. 300 addresses the same point, but I am not entirely sure. The derivatives contracts legislation in the Finance Act 2002 needs to be amended to make it clear that the Bill does not apply to options over securities when the options form part of a repo. Amendment No. 309 would ensure that the Bill does not apply to options over securities.

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

I am unable to accept the amendment, but I hope that I can help the hon. Gentleman. The amendment should not be necessary, because if a company follows the relevant accounting standards for a sale and repurchase agreement, there should be no question of an overlap with the derivative contract rules. In other instances, the amendment would go too far and take in transactions outside the scope of the derivative contract rules. However, I have asked officials to continue their dialogue with the professional bodies on the matter, in order to ensure that their interpretation is met. I invite the hon. Gentleman to withdraw the amendment while the dialogue continues, as I think that that offers the best way to resolve the matter.

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

I am pleased to learn that the Government have taken the underlying point, and 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. 307, in

schedule 38, page 423, leave out lines 26 and 27 and insert—

'(1) Paragraph 1 has effect where the agreement to sell securities falling within section 737A of the Taxes Act 1988 is entered into on or after 9th April 2003.'.

This is a further Law Society point. Paragraph 1 alters the amount of interest that the repurchaser of securities under repo is deemed to pay when section 737A of the Income and Corporation Taxes Act 1988 applies. In order to avoid disturbing existing repos, there is a fair argument that the amendment should apply only to sales that took place on or after 9 April. Amendment No. 307 would ensure that the provision in paragraph 1 would not apply to sales that occurred before Budget day.

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

I am afraid that I cannot accept the amendment. If it were enacted it would mean that the Finance Bill change to end the tax losses from the anomaly would apply only to deals agreed after the announcement was made. A lot of the deals were deliberately arranged to run for a long time—20 to 30 years—to try to take advantage if the law were only changed for the future. If existing deals were allowed to escape, tax losses of at least £10 million annually would continue for many years until the deals ended. The deals also have built-in break clauses. Clearly the parties expected the Government to act, and took careful precautions against it. Market players have not complained, and a number have commented that they fully expected this provision; they were not at all surprised or caught out by the announcement. On that basis, I think that the change in the Bill is appropriate, and I ask my hon. Friends to oppose the amendment.

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

The crucial point is whether the market would be damaged if people were taken by surprise. I have not heard huge wails of woe from the City of London, and I am, therefore, inclined to accept what the Paymaster General has said. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 38, as amended, ordered to stand part of the Bill.

Clause 181 ordered to stand part of the Bill.