Clause 54 - Trading profits etc. from securities: taxation of amounts taken to reserves

Part of Finance Bill (except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) – in a Public Bill Committee at 3:00 pm on 13 May 2004.

Alert me about debates like this

Photo of Quentin Davies Quentin Davies Conservative, Grantham and Stamford 3:00, 13 May 2004

The clause reflects the two points that I made this morning, which seem to run through the Bill as a theme. One is that the Revenue's intention is to have its cake and eat it. If there is a change in accounting rules, as there is with the introduction of IAS, and that change provides a benefit for the taxpayer, as it would were it not for this clause, the Revenue and the Government are proposing to make sure that the taxable profit is still judged on the previous GAAP basis. Once again, the position is ''heads you lose, tails I win''.

The other principle to which I referred this morning, and which I think is a bad principle that runs through the Bill, is that as accounting principles progress and better reflect economic reality—I think that we all agree that not only is that the purpose of IAS, but it is one that is largely achieved—the gap between that reality and the view of reality taken by tax law increases, because tax law gets left behind and we still

have tax applied on the previous GAAP basis. That will be the effect of the clause; it is retrograde and problematic.

I wish to ask a few practical questions. Again, we should be concerned with the theory, coherence, fairness and justice of tax—I make no apology for raising such issues—but we should also be concerned with the immediate practical impact of it. The Economic Secretary may tell me that I have misunderstood the proposal, but from henceforth and despite the introduction of IAS, if a company as defined in subsection (1) has assets that are available for sale, even if they are not regarded by the company as there for the purpose of trading, any profit on them will be taxed as if they were trading assets. The Economic Secretary indicates through his body language that I have misunderstood the effect of the proposal.

A question arises as to the possible perverse impact of such a definition of assets available for sale. I can think of all sorts of examples in which a company as defined in subsection (1) may have assets available for sale that are significant in relation to its net worth, or at least to its profits. Any taxation of changes in the value of such assets would be a major contributor to the volatility of the company's profits, as my hon. Friend the shadow Chief Secretary explained.

Let me give the Economic Secretary some examples. I hope that he will tell me that my concerns are unfounded. If a bank takes a strategic stake in another bank—a quotable security, an asset that would be marked ''to market'' or held at the lowest of cost or market—and there is a profit, would that profit be taxed? The profit would be considerable if the strategic stake were in a bank with which the tax-paying bank had a strong relationship. Perhaps the strategic stake is accumulated for the purpose of a long-term relationship that is relatively stable; however, the value of the shares is not stable at all. Perhaps the stake is accumulated for the purpose of making an eventual acquisition. The taxpayer would not regard it as a trading asset. Would a strategic stake of that kind be caught? If so, the effect that my hon. Friend outlined would undoubtedly occur. There would be considerable volatility of profits and exposure of the tax-paying bank to substantial amounts of tax as a result of a structural investment. That seems completely contrary to the traditions of our tax law and certainly very bad for business generally.

Let us say that a bank were faced with the prospect of making a debt-equity swap. Should we discourage banks from making such swaps? Suppose the bank had a customer that ran into considerable trouble and the only way of saving it, rather than throwing it into bankruptcy and putting thousands of people out of work—I do not suppose that the Government would really want that to happen—would be to take over part of the equity of the company through a debt-equity swap. Is it the Government's intention that the tax law should prevent such a transaction from taking place?