Clause 65 - Restrictions on set-off of pre-entry losses

Finance Bill – in a Public Bill Committee at 4:30 pm on 30 June 2005.

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Photo of Richard Spring Richard Spring Shadow Minister, Treasury 4:30, 30 June 2005

I beg to move amendment No. 161, in clause 65, page 54, line 11, leave out

'resident in the United Kingdom'.

Photo of Frank Cook Frank Cook Labour, Stockton North

With this it will be convenient to discuss the following amendments: No. 162, in clause 65, page 54, line 19, leave out from ''the'' to end of line 24 and insert

'most recent relevant event in relation to the company from which the asset was so transferred;''.'.

No. 163, in clause 65, page 54, line 28, leave out subsections (4) and (5).

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

These are probing amendments and I would be grateful if the Minister commented on them. They emerged from Law Society representations. I do not wish to detain the Committee long, but I want to set out some of the ideas that have been put to us. If some reassurance can be given, that will be valuable.  

Amendment No. 161 relates to the pre-entry loss rules that prevent capital gains tax groups buying in capital losses from other capital gains tax groups. There is no need for the requirement for the SE to be resident in the UK as there is already a requirement that the relevant assets are within the charge to corporation tax on capital gains; for instance, if the SE is not UK resident, there must be a UK taxable branch that is a permanent establishment of that SE. That introduces more flexibility into the SE rules.

Amendment No. 162 relates to the pre-entry loss rules in the Taxation of Chargeable Gains Act 1992. The pre-entry loss rules work to prevent the purchase of capital losses from outside the capital gains tax group to shelter future capital gains. The relevant event determines when the asset became pre-entry. The amendment seeks to ensure that these rules are not triggered on formation of an SE by merger, which will allow greater flexibility and ensure that where there is a merger, which requires a particular structure by way of the definition of merger in the Council directives relating to SE and mergers of publicly limited companies, the formation of the SE does not cause any existing pre-entry losses to lose their restricted pre-entry nature on the SE merger.

The clause has the same effect, provided that the company transferring the asset to the SE does not cease to exist as part of the process of forming the SE by merger. However, the requirements to form an SE by merger under the relevant EU company law regulations mean that the clause should not open such a door, as no publicly limited company is going to spend the money, make the public announcements and tie themselves into an SE and the issues involving worker representation on the board, in order to get around a small part of the capital gains tax rules that the Government have suggested they intend to overhaul radically, if not abolish, when they legislate for their major reform of corporate taxation.

Amendment No. 163 simply continues to address that issue in terms of the definition of groups related to this category.

I would be grateful if the Minister could give some reassurance to those who have raised with us concerns about these matters.

Photo of John Healey John Healey The Financial Secretary to the Treasury 4:45, 30 June 2005

The clause adapts the special anti-avoidance rules in schedule 7A of the Taxation of Chargeable Gains Act 1992. Without the changes, companies might be able to use the formation of an SE by merger as a means of tax avoidance. In addition, there would also be a disparity and an inconsistency of treatment compared with wholly domestic mergers.

The hon. Gentleman asked me to indicate why we feel the amendments are either deficient or not acceptable. Amendment No. 161 seeks to remove the restriction of the clause solely to those SEs that are resident in the UK. If accepted, that would mean that in theory the legislation was capable of applying to any SE wherever resident. That is beyond the competence of the UK Government. Consequently, while I understand that the amendment is well intentioned, it is technically deficient.  

Amendment No. 162 is, again, undoubtedly well intentioned, but its adoption would create ambiguity as to the meaning of the ''most recent relevant event''. That is because our existing legislation relating to relevant events does not cater for the situation where an SE is formed by merger and it is not the company which joins a new group. Instead, the effect of the merger might be that assets are transferred to the new UK-based SE. If the amendment were accepted, there would be a gap and businesses might be uncertain about whether the desired continuity would apply to mergers to form UK SEs.

Finally, amendment No. 163 seeks to remove subsections (4) and (5) from Clause 65. It would have the unfortunate effect of removing the anti-avoidance protection that is in the clause. It would also result in more favourable treatment for the formation of SEs by merger compared with wholly domestic mergers. I am sure that that is not the hon. Gentleman's intention. On that basis, I hope that he will not press the amendment to a Division.

Photo of Richard Spring Richard Spring Shadow Minister, Treasury

I thank the Minister for his explanation. Undoubtedly it will be read avidly by those who wish to pursue this matter. I hope that his answers will satisfy them. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 65 ordered to stand part of the Bill.