Schedule 41 - Companies in administration

Part of Finance Bill – in a Public Bill Committee at 5:15 pm on 17 June 2003.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 5:15, 17 June 2003

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.