I beg to move amendment No. 295, in
schedule 41, page 428, line 21, at end insert—
'(7ZB) For the purposes of this section an administrator (who is the proper officer of a company) may elect that subsections (3)(da) and (7ZA) do not apply.
(7ZC) An election under subsection (7ZB) must be made—
(a) in writing,
(b) to the Inland Revenue,
(c) no later than one year after the date the company enters administration.
(7ZD) An election under subsection (7ZB) is irrevocable.'.
With this it will be convenient to discuss the following:
Amendment No. 296, in
schedule 41, page 428, line 23, leave out '(7ZA)' and insert '(7ZD)'.
Amendment No. 327, in
schedule 41, page 428, line 26, at end insert—
'(1A) In subsection (1), after ''liquidator'' insert ''or administrator''.'.
The Government will be aware that there has been a fair amount of unhappiness among the professions about the arrangements in the schedule. There is a view that the schedule makes matters more difficult for those sorting out companies in administration.
We have here another piece of legislation that is, essentially, raising more tax. The provisions of paragraph 1 will bring the accounting period of a company to an end on the appointment of an administrator, which will restrict the ability of the company to set off trading losses in the accounting period in which the administrator is appointed against chargeable gains realised following the appointment. That will aggravate the problem that arises when a company goes into liquidation—trading losses brought forward are not available for set-off against chargeable gains arising on the disposal of fixed assets of the trade by the liquidator.
The availability of group relief will also be adversely affected, and such problems might have a significant impact on the ability of creditors to recover their debt from a company in administration. There is a view that the provision constitutes a retrograde step.
Paragraph 9 amends the loan relationship legislation. Under the revised definition of control, which is contained in section 87A of the Finance Act 1996, it is probable that a company would lose control of a subsidiary that went into administration or liquidation. That could make it difficult to restructure the inter-company borrowings that had been made by that company as it would no longer be connected with the lender, on the basis that it would no longer be controlled by the ultimate parent company within the meaning of section 87A. Thus, any release of the loan would be held to constitute a taxable receipt. That is an existing problem that will be exacerbated once the change to the taxation of companies in administration comes into force. A legislative change is required to ensure that a borrower would continue to be connected in such cases, or at least to ensure that it would only be taxed on the release of the loan relationship to the extent
that the lender was able to obtain bad debt reliefs for losses arising after the connection ceased.
We also feel that a reference to the administrator needs to be added to section 108(1) of the Taxes Management Act 1970. I shall come to that in a minute. Finally, while the changes are recognised as being necessary as a result of the introduction of the Enterprise Act 2002, the legislation does not seem to deal with the position in which a company in liquidation subsequently moves into administration. Under the current system, a company going into liquidation loses beneficial ownership of its assets, whereas one going into administration does not. If, under the new system, a company loses ownership of its assets on commencement of liquidation, what will happen to its assets if it subsequently goes into administration? If it continues to have lost ownership of its assets, its position will be worse than it would have been had it not first been in liquidation. The issue needs to be clarified.
The general view, and that reflected by our amendments, is that the proposed changes to section 12 of the Taxes Act 1988, dealing with corporation tax and the periods of assessment, are unnecessary, could be unfair and might result in unplanned tax liabilities. They will add a layer of complexity to the taxation treatment of companies in administration that could deter creditors from using the administration process. Our amendment provides that section 12 should remain unchanged, or, alternatively, that its introduction should be delayed until the Revenue has had an opportunity to consult further. As an alternative, to prevent companies from being disadvantaged, the legislation could be amended to provide administrators with the right to make an election to disapply the new changes to section 12 that are introduced by the Bill. That would have the effect of ensuring that companies in administration were treated for tax purposes on the same basis as solvent companies. Dropping the proposed changes or permitting an election to disapply the proposed new provisions would ensure taxation on the same basis as a solvent company. One year should be long enough for the administrator to consider the company's tax position and to make an election. Those points relate to amendments Nos. 295 and 296.
Amendment No. 327 aims to add reference to an administrator, and raises a Law Society point. A reference to the administrator needs to be added to section 108 (1) of the Taxes Management Act 1970 so that the rule that everything done by a company may be done through any person with the express, implied or apparent authority of the company does not apply when an administrator has been appointed.
Finally, it seems to me and to many professionals that the arrangements have not been fully thought through. I do not know whether the Government wish to come back on any of the amendments, but this is an aspect of the Bill that is in no way party political.
I thank the hon. Gentleman for moving the amendments because he has given me the opportunity to address concerns about measures for companies in administration. Before I raise the hon. Gentleman's hopes too high, I must tell him that I will
not accept the amendments. However, I hope that he will find my words helpful.
The intention behind the clause and the schedule is to improve the environment for companies in administration, and not to try to extract additional corporation tax from them. That is why the measures were assessed as neutral to the Exchequer. Amendments Nos. 295 and 296 aim to provide an optional let-out from the new rules on company accounting periods for companies where it is perceived that the old rules would be more advantageous. There are a number of problems with that. First, any perceived tax advantage under the old rules was anomalous and uncertain. For example, there could have been a tax advantage if the date when a company went into administration happened to be in the middle of an accounting period, but not if that date was earlier in the accounting period.
Secondly, the amendments do not recognise the fundamental changes in the duties and responsibilities of administrators made by the Enterprise Act 2002. Consequently, they are likely to undermine the better environment that we are trying to put in place for companies in administration. In particular, administrators will be able to make distribution to creditors. Consequently, it is necessary to clarify tax law on the responsibilities of administrators for corporation tax. The draft rules that were published last week by the Insolvency Service will bring administrations broadly in line with liquidations. Those rules were developed in consultation with a wide range of interested parties, including the insolvency profession.
To ensure the proper attribution of responsibility for tax matters, we need a clean break between the tax arising during the period of administration, and tax arising for prior or subsequent periods. Without such a rule, tax arising on pre-administration activity could become an expense of the administration, resulting in less money for return to creditors. Although well intentioned, the amendments would cause more damage than the perceived difficulties that the hon. Gentleman identifies. I urge him to consider withdrawing the amendments. If he does not, I will ask my hon. Friends to oppose them.
I appreciate that amendment No. 327 is intended to be helpful. However, I am sure that the hon. Gentleman will be minded to withdraw it after I explain why I must oppose it. The proposals would marginally increase administrators' tax responsibilities, but do not require administrators to perform those duties. They may still be delegated to a company's tax department or a company secretary. On the other hand, the amendment would require the administrator to personally look after the company's tax affairs. In other words, he will not be able to delegate responsibility for the company's tax affairs. That would be an unnecessary burden on administrators for no real gain. If an administrator felt that he or she wanted to retain control of those matters, he or she could make it clear that no one else had authority to act on behalf of the company. An administrator could still dismiss errant directors or other employees.
The disadvantages of the amendments outweigh the advantages. I cannot accept them, and I will ask my hon. Friends to oppose them, but over the next few months the Inland Revenue will engage in dialogue with the insolvency profession on a number of issues, including some of those that the hon. Gentleman has raised. That could provide an opportunity properly to consider the evidence on the effects of tax on decisions taken about insolvent companies. That could possibly lead to measures next year dealing with all forms of company rescue, which would be a much better way to proceed.
The hon. Gentleman mentioned loss of control and company loan legislation. There is no change of treatment here, merely the use of new terms. Having acknowledged the importance of the points that he has raised, explained the difficulties of the amendments and explained how the Revenue intends to proceed with the insolvency profession to address these issues, I hope that the hon. Gentleman will agree to withdraw the amendments. If he feels unable to, I shall ask my hon. Friends to oppose them.
I thank the Paymaster General for her constructive response. As I said, we are aware that the need for this legislation results from the Enterprise Act 2002. I repeat my point: we do not believe that that legislation deals with the position in which a company in liquidation subsequently moves into administration. However, on the basis of the continuing consultation to which she referred, we do not want to press the amendments. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Schedule 41 agreed to.