Schedule 8 - Loan relationships: miscellaneous amendments

Finance Bill – in a Public Bill Committee at 9:30 am on 13th May 2004.

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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 9:30 am, 13th May 2004

I beg to move amendment No. 53, in

schedule 8, page 285, line 38, leave out 'from' and insert 'from—

(a)'.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss the following amendments: No. 54, in

schedule 8, page 285, line 41, at end insert

'; or

(b) being deemed to be controlled by another company, by virtue of section 416(2) of the Taxes Act 1988, where control is exercised by the general partner of a CIS limited partnership'.

No. 55, in

schedule 8, page 289, line 4, at end add—

'8 (1) Section 87 of the Finance Act 1996 is amended as follows.

(2) In subsection (5A) (cases where a partnership is a creditor or debtor in a loan relationship) in the closing words, for the words from ''a limited partnership'' to the end of the subsection, substitute ''a CIS limited partnership''.

(3) After subsection (5A), insert:—

''(5AA) In this section—

''CIS limited partnership'' means a limited partnership

(a) which is a collective investment scheme, or

(b) which would be a collective investment scheme if it were not a body corporate.

''collective investment scheme'' means ''a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000''.

(4) These amendments have effect for accounting periods ending on or after 13th December 2003.

9 (1) Section 87A of that Act is amended as follows:

(2) In subsection (3) (partnerships involving companies) in the closing words, for the words ''a limited partnership'' to the end of the subsection, substitute ''a CIS limited partnership''.

(3) After subsection (3), insert:—

''(4) In this section—

''CIS limited partnership'' means a limited partnership

(a) which is a collective investment scheme, or

(b) which would be a collective investment scheme if it were not a body corporate.

''collective investment scheme'' means a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000''.

(4) These amendments have effect for accounting periods ending on or after 13th December 2003.

Interpretation of references to major interests

10 (1) Paragraph 20 of Schedule 9 to that Act is amended as follows:

(2) In subparagraph (5) (partnerships involving companies) in the closing words, for the words from ''a limited partnership'' to the end of the subsection, substitute ''a CIS limited partnership''.

(3) In subparagraph (6) in the closing words, for the words from ''a limited partnership'' to the end of the subsection, substitute ''a CIS limited partnership''.

(4) After subparagraph (6), insert—

''(6A) In this paragraph—

''CIS limited partnership'' means a limited partnership

(a) which is a collective investment scheme, or

(b) which would be a collective investment scheme if it were not a body corporate.

''collective investment scheme'' means a collective investment scheme within the meaning of section 235 of the Financial Services and Markets Act 2000''.

(5) These amendments have effect for accounting periods ending on or after 13th December 2003.'.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

Our amendments and the next two cover crucial issues under the schedule. With your permission, Sir John, I shall include in my comments on these amendments any minor comment that I might have made in a debate on the whole schedule.

The amendments to the bad debt relief rules for debts between companies that were connected but became unconnected as a result of insolvency proceedings are the third part of the territory covered by the schedule. If companies are connected, the bad debt write-off is non-deductible on one side and non-taxable on the other. However, that is not the case when companies are unconnected. There is a gap in the existing rules that means that it is possible for a one-sided tax effect to arise because of a lack of clarity on which arrangements left companies unconnected. Schedule 8 clarifies in detail the rules governing connection. We have no perceived problem with the rules. Indeed, because they clarify the conditions under which release of a debt can be made without a taxable credit arising on the debtor in certain insolvency proceedings, we view them as helpful.

Amendments Nos. 53 to 55 relate to the late interest rules, which are highly technical. The Government's changes are split into two parts. According to the boasts of the Inland Revenue briefing note, the first makes changes to put beyond doubt a point of concern for the venture capital industry. Many believe that the Government's proposals in paragraph 2 will not achieve the desired objective in relation to investments by private equity funds that are not collective investment schemes. They are bodies corporate even though they are limited partnerships.

The point of concern revolves around whether companies owned by private equity partnerships could deduct interest on their loans from those partnerships on an accruals basis, even if the interest were rolled up or not paid within 12 months from the end of the accounting period, and arose because the rule affects interest paid by a close company.

Most private equity investments are treated as close companies, because each private equity investor must attribute all the partnership interest to itself to work it out. The Bill introduces a measure that exempts a partnership from the need to attribute interest, which the industry greatly welcomes, but concern remains that the general partner of the private equity partnership could still make the partnership close because of the control that it exercises on behalf of the other partners. Amendments Nos. 52 and 53 would extend the definition of the collective investment scheme-based close company to cover that point.

Another concern relates to the same provisions. Customarily, private equity groups used a two-tier structure, which ensured that private equity investment could deduct interest on an accruals basis. Following the Finance Act 2003, the view was that that was no longer effective unless the creditor was a collective investment scheme, as defined in the Financial Services and Markets Act 2000. That carve-out has been helpfully supplemented by the Bill, with another small exception.

The Government's proposed exemptions may remove the CIS-based companies when the creditor is a participator, but they do not seem to do that when the creditor has control of the company or a major interest in it. I am told that there is a common circumstance in which a general partner receives a substantial amount of the income from investments in periods during which there is no capital realisation and when the partner could be deemed to control, or have a major interest in the investment. We therefore propose that the exemption for CIS limited partnerships should be extended to situations in which the partnership controls the major interest, and not only where it is a participator. Amendment No. 55 seeks to address that issue.

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

Good morning, Sir John.

I shall respond to the amendments tabled by the hon. Member for Arundel and South Downs (Mr. Flight) by putting into context schedule 8, which makes changes to legislation on loan relationships and derivative contracts that have been identified in the post-implementation consultative group, of which the hon. Gentleman is aware. It deals with some loopholes that have emerged since 2002, covers areas such as the treatment of certain venture capital limited partnerships by relaxing further an anti-avoidance rule that had an unintended effect on those partnerships, and deals with companies in insolvency proceedings by extending the circumstances in which they can avoid being taxed on imaginary profits. It also covers companies that emigrate or move assets from a permanent establishment by ensuring that tax is charged on profits accruing up to the date of the move, and covers the major interest test for

deciding if companies are connected and so receive special tax treatment. As the hon. Gentleman said, this is a highly complex area of tax law.

It is the Government's view that, together, amendments Nos. 53 and 54 create an unjustifiable new category of loans that can be exempted from the late interest anti-avoidance rules. The late interest rules prevent a tax deduction for interest that has not been paid within 12 months of the end of the accounting period, and they apply where the lender and borrower are connected or under common control.

Amendments Nos. 53 and 54 add a completely new category of venture category funds whose loans would be exempt from the late interest rule. That new category covers limited partnerships funds, where the late interest rule applies because the general partner is the only partner who can manage the partnership. By excluding loans from those funds from the late interest rules, the amendments seek to disregard the central role of the general partner.

The Government are proposing changes that do no more than put beyond doubt the circumstances in which the late interest rules are set aside for loans made under limited partnership venture capital funds. One change makes sure that the existing exemption covers some of the foreign partnerships that the industry argued are otherwise excluded because they have some corporate characteristics. The other change stops some loans made by venture capital funds from coming under the late interest rules as a result of an individual being a partner in the fund. We consider that those changes go as far as is needed to address the difficult areas of foreign legal concepts, and cases where individuals are partners in such funds. As the hon. Gentleman said, the changes have been welcomed by the industry.

I recognise the point that the hon. Gentleman and the industry have been trying to make, but I am trying to explain the difficulties to the Committee. The amendments represent a significant step beyond the clarification of the existing exemptions from the late interest rules that is proposed by the Government. They go to the heart of the concept of control, which is used widely in the Taxes Act 1988 as a trigger for anti-avoidance rules. I am not minded to take this step because of the risk of weakening the rules; to do so would carry significant and unjustifiable risks for the Exchequer. I entirely accept that it is a complex area, but as a Minister I am clearly making the judgment on advice from my officials. Although we listen carefully to what the venture capital industry is saying, we cannot allow the breach of wider rules.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury 9:45 am, 13th May 2004

I want to go back to something that the Minister said a few minutes ago, about the general partner having a lot of control over the private equity companies that they manage. They have that control as the investment manager on behalf of the other investors, and not in the normal context of controlling a close company. I trust that she would agree that it is inappropriate for the requirements to apply in that situation. If she does not like our amendments and

thinks that they go too far, how else does she hope to deal with the issue?

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

As I tried to explain, the rules that were set in 2002 were widely welcomed and are working well. Discussions with the venture capital trust industry are continuing and a number of issues are being raised. The role of the general partner is at the heart of a number of issues in the tax system. It is one thing to identify an issue for a particular industry. However, I have to ensure that we do not allow a particular industry or sector to operate in a way that we did not allow anywhere else, for good reason, under the Taxes Act and other legislation. Amending the control tests, even narrowly as suggested in amendments Nos. 53 and 54, is not appropriate, because it would risk weakening existing legislation that applies elsewhere.

It is not within the gift of Government—we would be challenged—to say that a particular industry could work in one way but that everyone else could not. I have to pay attention to the general rules. The hon. Gentleman will understand that a relaxation of the control test in one part of the system will cause significant problems across the board. I think that he is well aware that dialogue between the Inland Revenue and the venture capital trust industry continues. It has raised the matter with us, but what he suggests is not appropriate and cannot be done. He asks how else I would do it. Frankly, I cannot give him an answer. The fundamental point is what happens elsewhere in the tax system.

I turn to amendment No. 55, on which I might be a little more helpful, although I do not want to raise the hon. Gentleman's hopes—I am not going to accept it; I thought it best to give that caveat, just in case. It seeks to extend the application of the new definition of a collective investment scheme limited partnership to areas of legislation beyond the application of the late interest rules.

As I said earlier, when outlining the provisions of schedule 8, the Government propose a change that puts beyond doubt the circumstances in which the late interest rules are set aside when a limited partnership venture capital fund has invested in a close company. We consider that the changes go far enough to address difficult definitional areas, and they are welcomed by the industry.

To the extent that there remain areas of difficulty, the Revenue will continue discussions with the British Venture Capital Association , with a view to resolving the difficulties through revised guidance. I confirm that the existing clarification in Revenue guidance will not be withdrawn. Concern was expressed by the industry that that guidance would be withdrawn as a consequence of schedule 8, but it will not be.

I hope that the hon. Gentleman agrees that we are doing our best to respond to the particular issues raised by the industry, but we clearly have to draw a line. We are not going to allow, nor should we, the breach of other legislation. I hope, at least for now, that the hon. Gentleman considers the matter to have

had a good airing and that he will withdraw the amendment. If he presses it to a Division, I shall ask the Committee to reject it.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I am pleased to note the Minister's comments on amendment No. 55, which make it clear that the existing guidance will continue, and she broadly acknowledges the issues raised by amendments Nos. 53 and 54. I repeat that, to my mind, the essence of the point is simple, which is that a general partner managing a venture capital portfolio is doing a professional rather than a close company job. Somehow or other, a method needs to be arrived at to resolve the problem.

I take the Minister's point that our amendments could have too wide an implication. In a sense, to consider the matter the other way round, the moral is that the industry cannot use partnership structures, and would have to structure itself differently, which is broadly undesirable in the territory of venture capital. I will withdraw the amendment on the basis that the points have been picked up, but I hope that the Revenue and the Minister will find some way to deal with the niggling little problem that has not yet been resolved. 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, Economic Affairs, Shadow Chief Secretary to the Treasury

I beg to move amendment No. 52, in

schedule 8, page 287, leave out from beginning of line 35 to end of line 27 on page 288.

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

With this it will be convenient to discuss amendment No. 56, in

schedule 9, page 289, line 25, leave out paragraph 3.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

The most significant problem arising from the schedule is the exit charge imposed on loan relationships that are taken out of the UK tax debt. I assumed that that aspect of the measure was to deal with the probable European Court of Justice ruling in the de Lasteyrie case. Putting that in its widest context, the door is wide open for a European Union country to lower their company tax rates, so that companies base themselves there and not in another EU country. In a sense, Ireland has already done that. I support tax competition, but all the gates have been left down, which will be a big problem for UK corporate tax revenues. As I said on Second Reading, that is a larger potential problem for the Revenue with regard to loss of revenue than some of the anti-avoidance measures that the Bill makes so much of.

The exit charge is a deterrent for companies wishing to move to the UK, and is one of the levers to stop companies basing themselves where corporate tax rates are lower. From 17 March this year, if a company ceases to be resident in the UK, or permanently established here, it signs its loan relationship assets and liabilities in such a way that they are no longer held for the benefit of a UK permanent establishment. The company will be treated as if it were assigned, and had then immediately reacquired its assets and liabilities at open market value. That could result in a substantial exit charge if the loan assets are sitting at a profit.

The Law Society, the Chartered Institute of Taxation and others have issued comments that advise that the new provisions are contrary to the principles established in the recent ECJ de Lasteyrie case. That case related to a French individual who moved his fiscal domicile to Belgium. Under French rules, he was immediately subject to a notional capital gain on his shares. The ECJ held that the French exit charge rules were contrary to freedom of establishment. Since that case, the EU has asked Germany to amend its exit rules, which it argues are also contrary to the freedom of establishment. The EU is also reviewing the rules in other member states.

If the proposals are deemed illegal under EU law, there is not much point in the Government implementing them. Amendment No. 52, which would delete the exit charge rules, is in essence a probing amendment, tabled as if to say, ''If they don't work, there ain't much point in having them.'' The Dutch, Germans, Danish and French have all raised objections about the erosion of the tax base and fiscal cohesion and control, but those were roundly rejected by the ECJ. If the rules come under attack from the EU, what will the Government's defence be? If the answer is anti-avoidance, the Government should be reminded that the Advocate-General in the de Lasteyrie case accepted that the need to prevent tax avoidance was a justification for a restriction of fundamental freedoms only if it were specifically targeted towards the relevant fiscal advantage. Our advice is that the exit charge appears too widely drafted to satisfy that requirement. I would be interested to hear how the Paymaster General thinks that she is going escape, following the de Lasteyrie precedent. The EU seems to be undermining her objectives.

Amendment No. 56 relates to schedule 9 and essentially makes the same point, but in a different context.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs) 10:00 am, 13th May 2004

I, too, welcome you, Sir John.

We are debating a further encroachment on the UK's ability to alter its tax laws. That ability is circumscribed by European Union law. The intervention could be described as benign, because, as has been said, the de Lasteyrie du Saillant case made it clear that it is unlawful under EU law, being contrary to the freedom of establishment, to impose a penalty or an exit charge on loan relationships taken out of any EU tax regime.

The Law Society has suggested an amendment that is rather different from amendments Nos. 52 and 56. It takes the view that there is a serious risk that new paragraph 10A is contrary to EU law for the reasons that I have given. The judge at the European Court of Justice found that the French exit charge could not be justified on the grounds that it was designed to prevent tax avoidance, unless it was specifically targeted at artificial arrangements. The Law Society has suggested a different amendment, which, unfortunately, is not up for debate. Nevertheless, I would be delighted to hear

the Paymaster General's comments on it. It is a finesse on the amendments that we are debating.

The Law Society takes the view that the following addition could get round the problem, and I present it as a constructive suggestion. It says that new paragraph 10A

''shall not apply unless the avoidance of a liability to corporation tax was the main purpose or one of the main purposes of the company ceasing to be resident in the United Kingdom or the asset or liability ceasing to be held for the purposes of a permanent establishment in the United Kingdom.''

Photo of Michael Jack Michael Jack Conservative, Fylde

With a build-up like that, I hope that the question is not disappointing. In suggesting the wording from the Law Society, will the hon. Gentleman expand a little on the tests that might be employed to determine whether the action to be taken by the company was in pursuit of the avoidance that lies at the heart of his proposals?

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

The right hon. Gentleman suggests that the Law Society makes amendments to encourage further work for lawyers. I am not sure whether that is the thrust of what he says, but as he knows, there is a welter of cases about what is and what is not the motive for tax avoidance.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

Recalling our debate on the disclosure of VAT avoidance schemes, I wonder whether a further crafting of the proposals could relate to the benefits rather than the purpose, which is the underlying principle that the Government will seek to use later on.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

We did have an interesting debate on the subject of benefits and purposes and we discussed other leading tax avoidance cases, not least Ramsay and Furniss v. Dawson.

There is a flaw in new paragraph 10A, and the Law Society has made a proposal to overcome it. What advice have Ministers received about the enforcement, or otherwise, of the provision?

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

I shall ask the Committee to reject the amendments. They would stop the introduction of a new rule—fair value accounting to loan relationships and derivative contracts of companies in their last accounting period prior to becoming non-resident. Fair value accounting recognises profits and losses arising from changes in the market value of the contracts.

Paragraph 5 of schedule 8 and paragraph 3 of schedule 9 introduce the rule, and it applies to companies that cease to be UK residents in circumstances where their loan relationships and derivative contracts are accounted for on an authorised accrual basis. The rule also applies to the transfer of non-UK resident companies' loan relationships and derivative contracts from their UK-permanent establishment.

The fair value rule is even-handed in its application. It will allow relief for a loss at the point of emigration to the extent that that relief has not already been

claimed, and it will also tax gains. In addition, it complements the existing rules that ensure continuity of treatment within groups of companies for loan relationships and derivative contracts that are accounted for on an accruals basis. The rules are intended to allow a group's commercial freedom to transfer such contracts between group members without incurring tax.

It will not come as a surprise to the Committee that I reject the view that the proposed fair value rule is in contravention of the EC treaty. It can be distinguished from the French exit charge on several grounds. The Lasteyrie decision concerns a specific French income tax charge on individuals that the ECJ found to be disproportionate—a point to which the hon. Gentleman referred with regard to anti-avoidance. It is not, as a matter of principle, a blanket prohibition on all exit charges.

The decision is not applicable to the proposed charges to UK corporation tax, which is a charge on companies. The fair value rule exists to tax only deferred gains in a company's final accounting period within the charge for corporation tax.

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

If I could just finish that point, I might be able to answer the hon. Gentleman's question on the ECJ ruling in the French case. [Interruption.]

Photo of John Butterfill John Butterfill Conservative, Bournemouth West

Order. The right hon. Lady must be heard.

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

Thank you, Sir. John.

The fair value rule does not create a new tax charge. It simply requires that one recognised method of accounting, fair value, is used in place of another recognised method, accruals, when a corporation tax computation must be made. It ensures that UK companies are properly taxed on the full profits they have made while they are in the UK on loan relationships and derivative contracts. To do otherwise would be to give them an unfair advantage over other UK incorporated companies. That is very clear, and hon. Members should keep that in mind.

The hon. Member for Arundel and South Downs referred to several countries, including Germany. Germany has been asked to amend its exit charge on individuals, not companies. The issue that we are debating is whether deferred taxes are paid before a company leaves the UK.

Before I give way to the hon. Member for Torridge and West Devon (Mr. Burnett), I wish to address the question about the Law Society, companies that are targeted for avoidance and the motive test. The motive test simply is not appropriate for a measure that is intended for general application. The Government do not accept that the ECJ decision in the French case applies to the legislation proposed in the clause and schedule. The measure provides a clear rule on the computation of profits for a company's final accounting period prior to its ceasing to be resident in the UK. The use of fair value, which is a recognised accounting method, is the most suitable for that.

I shall give way to the hon. Gentleman, but perhaps he could explain to the Committee why he thinks it fair that companies should be allowed to leave the UK without having paid deferred tax. If he does not think that that is fair, why is he opposing the proposals in the schedule?

Hon. Members:

Go on.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

I will not be pilloried in this way. The Paymaster General is traducing me. I was making a constructive suggestion, because I thought that she was in error. I am not yet wholly convinced that her explanation is adequate to overcome the problems that have been identified by the Opposition. I have a simple question for clarification. She said that the charge will apply only to deferred gains. Does she mean by that gains formerly rolled over, or does she mean all gains on all assets?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury) 10:15 am, 13th May 2004

The fair value method will ensure that the company concerned pays the corporation tax due in the UK on the gains at that date. Every other corporate body in the UK is expected to do that, subject to corporation tax rules. The spectre raised by the hon. Gentleman is that in some way the ECJ ruling in the French case is pertinent to the schedule. I have explained to him that it is not. The schedule applies not to individuals but to companies. It is about ensuring that they pay the tax that they owe to the UK.

Photo of Mr John Burnett Mr John Burnett Shadow Minister, Home Affairs, Shadow Solicitor General, Law Officers (Constitutional Affairs)

Companies can roll over for capital gains tax purposes. I hope that the Paymaster General can enlighten the Committee on that important point.

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

I think that I made it clear that the UK does not accept that the judgment in that case applies to these provisions and that it would be unfair if companies were able to use migration just to extinguish deferred tax liabilities. Some of those may have arisen when a loan relationship or derivative contract was owned by another group member, which created unfairness compared with other taxpayers. The new measure provides a clear rule for the computation of profits for the final accounting period of a company prior to its ceasing to be resident in the UK. Using fair value—a recognised accounting method—is the most suitable way to do that.

The proposition that the hon. Members for Torridge and West Devon and for Arundel and South Downs made in their contributions was that they do not believe that we achieve that objective because of the ECJ decision in the French case. I have explained—so I presume that they accept the underlying principle—why the suggestion that the ECJ case is relevant is not true and why the proposals are entirely fair.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I could not agree more with what the Paymaster General said from the point of view of a British person. I think that it is debatable whether the fact that Lasteyrie applied to an individual and not to companies rules out its relevance, because it seems to me that a judgment of principle was made.

The point that the Paymaster General is not answering is this: if the issue is considered from the

perspective of the ECJ, the problem is that the ECJ does not regard transferring to another EU base as migrating. Its attack is that anything that creates fiscal penalties merely because of migration within the EU, which it regards as one country for the purposes of tax, has to be wrong. If the Government do not accept that Lasteyrie, or the next judgment, means that the ECJ is going to attack that principle, they are naive. It is about time that the Government considered other tactics to deal with the ECJ attacks on the British corporate tax base.

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

In earlier debates, the hon. Gentleman raised the spectre of the ECJ, saying that its decisions could impinge on the UK corporate tax system. What I am saying to him is that the view of the Government—regardless of whether he thinks that it is a debatable view—is that the case that he cites is not relevant in those circumstances for the reasons that I have given.

I return to the major point. The proposals ensure that the full amount of commercial profit is taxed and that the full amount of any commercial loss is recognised in the accounting period prior to the company going offshore. That is interesting. We can discuss the views of various members of the Committee about whether the ECJ decision in the French case will impinge on it, but the advice that the Department has given me is very clear. I have explained the principles. I understand the concerns that the Law Society and others have expressed, but again I assert that the issues that have been raised are not relevant.

Photo of Michael Jack Michael Jack Conservative, Fylde

Given that there are similarities in corporate taxation in the United Kingdom and other member states, does the same general rule apply to companies from Germany or France, for example, that cease trading in their respective countries and come in the opposite direction? The implication is that such a company would have to pay its corporate taxes before moving here.

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

In answer to the question from the hon. Member for Arundel and South Downs and with regard to what the European Court of Justice asked Germany to do as a result of the judgment, it is interesting that Germany has been asked to amend its exit charge on individuals, not on companies. That reinforces the very point that I am making.

We have had an interesting debate. I hope both that I have made clear the advice of the Government and the principles that we are pursuing, and that the hon. Gentleman will withdraw the amendment. However, if he presses it to a vote, I will ask the Committee to oppose it.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary To the Treasury, Economic Affairs, Shadow Chief Secretary to the Treasury

I hope that the Minister is right, because I am perhaps even keener than she is to protect UK tax revenues, which we look forward to managing in the near future. She made a clear case as to why the Government's view is that they may escape the judgment of the de Lasteyrie case, and I hope that she is correct.

As I said, the intention behind the amendment was to probe the Government, which is quite the reverse of wishing to attack the measures. However, I remain deeply concerned that, if not Lasteyrie, there will be

something else sooner or later. It is time for British Governments to develop a somewhat wider strategy on the issue, or we shall keep finding one attack here and another attack there, and various aspects of corporate tax revenue will be under threat. We have had a focused discussion, so I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 8 agreed to.