I beg to move amendment No. 58, in
clause 38, page 42, leave out lines 15 to 19.
We now move on to the question of management expenses, which is not quite as it sounds. Those members of the Committee who, perhaps, were hoping that this might be something more personal may be disappointed.
Generally, we welcome the new ''expense of management'' rules, as we might reasonably call them. The amendment relates to what we consider to be the one retrograde step in the clause. I hope, Sir John, to catch your eye in the stand part debate, so that I can examine the broader issue.
The amendment relates to subsection (1), which provides that expenditure of a capital nature generally does not count as management expenses. For a long time there has been a fairly grey area in relation to management and expenses, but there has always been quite a clear set of rules governing capital and revenue, particularly in terms of trading expenses.
At one extreme, there are the day-to-day expenses of managing investments, which are clearly allowable, both under the old and the new rules. At the other extreme are the costs directly associated with the sale or purchase of a capital investment, which have been commonly accepted as capital, and for which relief is potentially available under the capital gains rule. In
between those two extremes are the costs incurred in considering investment strategy or deciding which investments to buy and sell. The treatment of that activity becomes crucial when a transaction falls through, and particularly when it produces abortive, and often substantial, transaction costs. Under new section 75(3), such costs would be capital and no tax relief would be available for them. In other words they would be—this will be of particular interest to those who follow tax matters closely—a tax ''nothing''.
From reading the clause, and from a cursory glance at the Revenue's draft ''Guidance for Management Expenses'', it appears that the Government's line is that despite the absence of specific capital exclusion in the old rules, the view has always been that such costs were not management expenses so no relief was available. I hope that the Minister will confirm that that is the view of the Revenue and the Government and, if not, that she will explain the provision.
If that is the Government's view, most independent experts in the field would regard it as directly undermining a long-held distinction in which all costs of managing investments are allowable, but those incurred in acquiring an investment are not. There should not be a middle ground.
I shall refer briefly to the representations made by the CBI regarding this matter. It stated:
''There is widespread concern over the proposed blanket disallowance of expenditure of a capital nature, which CBI members believe is both unnecessary and inappropriate, given the very different features of trades and investment businesses.''
The issue has reached the courts, notably in the case of Camas plc v. Atkinson in 2003, which involved the substantial costs of evaluating a projected acquisition that did not proceed. The Revenue lost the case in the High Court in July 2003, and I understand that the decision was upheld in the Court of Appeal in April this year.
The Minister will realise, and I hope that she will comment on the matter, that the independent view of the vast majority of experts is that the loss of the case provoked the introduction of new section 75(3). That is why they dispute—they have good reason for doing so—the Revenue's assertion that the provision is reinstating a long-held and generally accepted view of the law. They genuinely believe, and the evidence seems to support their belief, that the case was reaffirmed only two or three weeks ago and that is the reason for the clause.
The purpose of the amendment is to try to remove what is generally perceived as being a retrograde step in what is otherwise a generally welcome reform. I hope that the Minister will reflect carefully on the points that I have raised on behalf of those who are directly affected by the legislation.
May I make a quick point? I wonder whether the Paymaster General will clarify the position of capital allowances in relation to the expenses of management companies and companies with investment businesses. When such a company invests in computers and suchlike, presumably the effect of subsection (3) of new section 75 is not to
gainsay the ability of the company to claim capital allowances on such purchases. I hope that the Paymaster General can give us the necessary reassurance that that is not the case.
The Inland Revenue has always argued that under current law capital expenditure does not form part of allowable management expenses. In line with that view, the clause is not intended to restrict relief.
This provision, by stating that capital expenditure is excluded from relief, will ensure that relief for the expenses of managing investments in the context of an investment business is aligned with the rules for trading expenditure. Capital expenditure cannot be deducted when calculating the profits of a trade for tax purposes and it would be inconsistent and unfair to trading companies to allow a more advantageous treatment for investment business.
The general issue of relief for capital expenditure across the corporation tax system is best considered in the wider context of the corporation tax reform programme so that a consistent approach can be maintained. That exercise is continuing, and we have had a great deal of help from business, for which we are very grateful. Indeed, I referred earlier to that continuing debate on corporate tax reform.
The rule is one that I am sure companies will be able to apply in practice without undue difficulty. The distinction between capital expenditure and revenue expenditure has been developed by the courts over a long period and is fundamental to our direct tax code. The Inland Revenue has published draft guidance on how the test will be applied, and it will revise the guidance when it has fully considered the implications of the Camas case.
The rule on capital expenditure is but one aspect of the new management expenses regime. The Government are modernising the rules in response to representations received over a period of years, to extend relief for managing investments. That broadening of the scope of relief has been widely welcomed by business. The new regime will enable more companies to gain relief for the expenses incurred in managing their investments. It will also make it easier for companies to calculate the deductions to which they are entitled.
I accept the broader points, and we may have an opportunity to consider them in a moment, but does the Paymaster General accept that the provision creates a tax nothing? Given that the Government's shared objective with business is to reduce, if not eliminate, tax nothings, does that not conflict with the Government's overall aims?
To make the deletion requested by the hon. Gentleman would double the costs to the Exchequer of introducing the change. It is more appropriate to deal with the matter in the review that I have explained to him, so that we can see the system developing in the round.
The CBI's comments yesterday were submitted to each member of the Committee, and I am delighted that the CBI welcomes the extension of tax relief for the expenses of management investment, because it will benefit companies. It is new, and the Government are giving up tax revenue to provide that support to companies. As the CBI recognises, that removes a barrier that has created difficulties for holding companies that manage their subsidiaries and have their own trading activities.
The hon. Gentleman, referring to the CBI, said that it thought that the disallowance of capital expenditure was unnecessary and inappropriate because trading and investment businesses have different features. We cannot accept that there is a relevant difference; traders and investors will buy capital assets that yield income. Why? They are retained by the business. Traders will buy premises and machines, and investors will buy shares that yield dividends in properties from rents. It is right to make it clear in legislation that the rules for trading expenses and expenses for management investments are aligned.
On intervention, the hon. Gentleman said that the CBI thought that a nothing would arise from the new tax. In fact, the changes being made will remove the tax nothing and the potential for expenses of management investment to be denied relief because they are incurred by a company that does not qualify as an investment company. Although I understand that the CBI would like more, the proposals are very generous towards management expenses, and I ask the Committee to reject the hon. Gentleman's amendment should he press it to a Division.
It has been a useful discussion. The Paymaster General rightly quoted the CBI welcoming the broad principle of the provisions, and I entirely concur with that point. However, she sought to suggest somehow that the CBI's supporting evidence could be put to one side. I am not entirely sure that one can accept that welcome but reject the awkward parts of it.
The Paymaster General also seemed to say, ''Yes, there is a new tax nothing, but the good news is that we have got rid of a different one, so the net result is that we have merely replaced one tax nothing with another.'' If she wishes to correct that assumption, I am more than happy to give way.
I was going to respond to all the hon. Gentleman's points in one go, but I said that the changes being made would remove a tax nothing. I thought that that was quite clear. I did not say that the provisions created it and then removed it; I said that they removed a tax nothing.
I am glad that the Paymaster General has clarified her view because from her original statement it was unclear whether she accepted that there was a new tax nothing but that the benefit of the general proposals was that a different tax nothing was being lost, and that therefore there was a net balance. It is important to stress that because industry is working towards the reform of corporate taxes, and
merely to move forward but then take two steps back, or perhaps to be fair, one step back—
It has been a good debate but the hon. Gentleman is being somewhat unfair and so is business. Earlier, we heard the argument that we should not introduce provisions piecemeal; now we hear that we should introduce piecemeal the provisions that business definitely wants and take them out of the review. The management expenses are specific to the transfer pricing as well as the other arrangements that recognise the pressure on companies. I have made it clear that the corporate tax review of capital expenditure is the correct place to take the matter forward. Detailed discussions are taking place, and I thought that business wanted that rather than a rushed patch now.
I hope that we will not have any rushed patches at all. I suspect that we will have to agree to disagree in this area. The purpose of the amendment, as far as I was concerned, was to probe and to test the Paymaster General's exact view. I think that we have succeeded in doing that. I do not intend to press the matter to a vote. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Question proposed, That the clause stand part of the Bill.
A moment ago, we debated an amendment looking at a retrograde step that is part of the proposals; we turn now to their broader aspect. As I said earlier, we welcome the generality of what the clause represents. The clause, and the supporting clauses from 39 onwards, removes the requirement to be an investment company—in other words, one not involved in the trade—in order to claim the deduction from management expenses under section 75 of the Income and Corporation Taxes Act 1988.
It is fair to say that a number of difficulties have tended to arise when a company's activities are a mixture of trading and investment. That occurs most commonly in a group situation with holding companies that not only own subsidiary company's shares but carry on a trade at the same time. In larger groups, holding companies may well not carry on any—or any significant—trading activity, to avoid that problem. Sometimes no tax relief has been available to a mixed investment and trading company for any of the investment and management expenses, where the extent of the trading activities means that it is not an investment company for tax purposes. From talking to a number of those affected by the changes, and, indeed, from considering the responses to the Government's management expenses consultation, it is clear to me that, in most respects, the legislation before us reflects a successful consultation and a positive dialogue, subject to the specific difficulty that we just debated.
I also understand that the Association of British Insurers—to name but one example—is broadly content with the legislation of life assurance company-related management expenses. I think that comes a little further on; nevertheless it is an important part of the overall statement.
I think that if there is one area that is questioned, it is that relating to unallowable purposes, which is also referred to in the Government's draft guidance for management expenses. I conclude by saying that it would be helpful for the Committee, and for those organisations affected by the legislation, if the Paymaster General clarified exactly what is meant by an unallowable purpose.
The hon. Gentleman has covered the clause fairly adequately in that, first, it extends the range of companies able to obtain the tax deduction for the expenses management. Secondly, it puts the time of the reduction in a clear and modern basis; and thirdly, it recasts the complex rules for similar deductions for life assurance companies into a free-standing logical code. There has been consultation on those matters, and it has been widely welcomed by business.
The only point on which the hon. Gentleman seeks further clarification is the unallowable purpose test. He says that it needs clarification, perhaps in relation to management and investments in subsidiaries, especially—perhaps this was in the submissions sent by the Chartered Institute of Taxation—with regard to overseas subsidiaries. The point is clarified in the explanatory notes and the draft guidance published on the Inland Revenue's website. It is not relevant to the application of the test that a subsidiary company whose shares are held by a company that is seeking management expenses relief is not within the corporation tax charge.
If the hon. Gentleman wants to raise any further issues once he has read the draft guidance published on the Inland Revenue's website, I will be more than happy to receive his representations. I can assure him that the concern that the unallowable purposes test is too restrictive is without foundation, which I hope is shown in the explanatory notes and the draft guidance. I accept that the hon. Gentleman may not have had time to consider these matters, but, given that the guidance is draft and we are receiving comments on it, I will be more than happy to receive his if he feels that the guidance does not adequately deal with his points.
Question put and agreed to.
Clause 38 ordered to stand part of the Bill.
Clauses 39 to 41 ordered to stand part of the Bill.