The main purpose of clause 31 is to close another tax avoidance scheme that has been disclosed to Her Majesty’s Revenue and Customs and that could be used to defeat the aim of a targeted anti-avoidance rule introduced in the Finance Act 2006. That rule stops tax avoidance schemes that seek to secure a tax advantage, whereby a company is sold from one group to another primarily to transfer the benefit of capital losses between the two groups, and so reduce tax. We have also taken the opportunity to relax a provision of the 2006 legislation that affects only a small number of groups of companies that realised capital losses before the legislation came into effect.
We now realise that the softening of the targeted anti-avoidance rule provided by the clause goes a little too far, and would result in the rule failing to prevent all cases of loss buying involving those protected losses, hence the need for the Government amendments.
Amendments Nos. 79 and 80 make the necessary changes to the text of the clause. They remove the protection that the losses enjoy from the effects of the loss buying targeted anti-avoidance rule where the parent company in the group is taken over as part of a loss-buying scheme. The clause still allows relief for the losses within the original group of companies if the takeover is for commercial purposes. It prevents relief only where one of the main purposes of the takeover is to secure a tax advantage from the losses for the new group.
Amendment No. 81 provides that the changes apply only to assets disposed of on or after 9 May this year, the date when the amendments were laid. The amendments have also been published on the Treasury website.
There are three reasons why I will urge my hon. Friends to resist what is proposed in amendment No. 83, but I look forward to hearing the case that the hon. Member for Chipping Barnet makes for it.
The Opposition broadly welcome clause 31 and its underlying intention. The additional anti-avoidance provisions in subsections (1) to (3) do not appear to cause any obvious problems and none have been brought to my attention. The further tweaks to the anti-avoidance regime provided in Government amendments Nos. 79 to 81 broadly appear to hit an appropriate target, so we will not be opposing those.
The relief granted by subsections (5) and (6) is welcome as far as it goes. I tabled amendment No. 83 to highlight a concern relating to the extent of the relief that those subsections provide.
Subsections (5) and (6) are aimed at correcting a problem with the anti-avoidance rules introduced by section 70 of the Finance Act 2006, which inserted sections 184A to 184F of the Taxation of Chargeable Gains Act 1992. An incidental effect of those rules was that they caught groups that had crystallised losses via de-grouping transactions taking place prior to the announcement of the 2006 Act measures in December 2005. Such de-grouping transactions are undoubtedly controversial, but they were considered acceptable at that time. The legislation could thus have operated retroactively to apply to transactions already undertaken prior to the announcement of the new measures.
Transitional measures were therefore included in the 2006 Act to prevent the rules from operating in that way and having that retroactive effect. In particular, the transitional arrangements were intended to cover the technique in use before December 2005 that allowed a group to crystallise loss on an asset that had fallen in value without actually selling the asset.
However, those transitional rules have since proved to be unduly restrictive. They included the condition that company B, which left the group as part of the relevant crystallising transaction, had to continue to be controlled by the principal company of the group that it had left. That denied relief under the transitional provisions in a number of cases, including when the company leaving the group had been sold to another group in an ordinary commercial transaction. It also denied relief where the company in question had been liquidated.
Another situation that was excluded from transitional relief was where the principal company of the original group was taken over or involved in a merger. Clause 31 amends the transitional arrangements in the 2006 Act so that they provide relief in a wider range of circumstances. They appear to be effective in extending the transitional provisions in the 2006 Act to capital losses crystallised prior to December 2005, and the Opposition broadly welcome that move.
However, it had been expected that the extension of the transitional arrangements and the relief that they provide would allow relief in all affected cases since December 2005. Instead, clause 31(9) provides that the relaxation of the rules takes place with effect only from 21 March 2007. Therefore, any gains realised between 5 December 2005 and 20 March 2007 will not receive relief under clause 31.
Amendment No. 83 would remedy that problem by providing that the changes made in subsections (5) and (6) of clause 31 applied in relation to disposals made on or after 5 December 2005, rather than just to those made on or after 21 March 2007.
I shall refer to an example that would be an issue in these circumstances. A group entered into a crystallising transaction prior to 5 December 2005, with the result that company B within the group carried a loss. The group then made a capital gain between 5 December 2005 and 20 March 2007. Clause 31 would not allow the group to use the losses crystallised in company B to offset that gain, because it occurred prior to the implementation of the relaxation of the transitional arrangements. Amendment No. 83 would permit the crystallised losses to be used in relation to gains after 5 December 2005, rather than only those made after 20 March 2007.
I acknowledge that that is not a wide-ranging point—only a few companies would be affected—but it would be useful if the Minister considered whether the relief granted by the clause should be extended in the very limited way proposed by amendment No. 83.
I would like to make a further point on the clause and add a few final words on the amendment of section 184B of the Finance Act 2006. The Opposition believe that it would have been useful to have further clarification in statute of the test set out in subsection (1)(c) of section 184B regarding the main purpose, or one of the main purposes, of the relevant arrangement. We had an extensive debate on the main purpose test this morning, and I highlight the matter only to indicate yet another context where the test is used and questions must be answered.
I recall, in particular, that the Economic Secretary indicated that the Opposition had never previously raised concerns about the main purpose test, but I recall my hon. Friend the Member for Wycombe having raised similar concerns on the main purpose test last year, and I believe that it may have been considered on other occasions. The test is of concern to the Opposition. We see that in this context, just as we saw it in the context of this morning’s discussion.
I am grateful to the hon. Lady for welcoming the Government amendments, but, as I indicated, I have a number of difficulties with the amendment that she proposes.
First, the amendment is technically defective as it would insert a repetition of the phrase
“unless the gains accrue to the company on a disposal of a pre-change asset” in section 184A(2) of the 1992 Act. Secondly, and perhaps more substantially, it would remove a relief that is of value for some companies. A change made by subsection (5) removes references to section 184B of the 1992 Act from section 70 of the Finance Act 2006. Section 184B is about gain buying and the references in section 70 provide relief to some companies that allows them to use capital losses against certain gains.
The references are being removed because they are needed only on a transitional basis, unlike the equivalent rule for losses—unused losses can be carried forward to later years, but gains are taxed in the year that they arrive. An undesirable effect of the amendment would be to remove the ability to set off losses against gains for a few affected companies and to remove that relief retrospectively.
Thirdly, and perhaps most significantly, the amendment could create an opportunity for tax avoidance of the type that the Government amendments are aimed at preventing. The Government amendments apply from 9 May this year. If the Opposition amendment was not technically defective, it would mean that the tax treatment of transactions in the 18 months from December 2005 onwards could be revisited. That would give a small number of companies an opportunity to try to obtain relief where they had bought losses from other groups. Given those three difficulties, I hope that I have persuaded the hon. Lady not to press the amendment to a vote.
I would like to comment on the point about the main purpose test, which the hon. Lady raised at the end of her remarks. Revenue and Customs has published extensive guidance that incorporates examples of arrangements that are likely to be caught by the legislation. In addition, the guidance, which was well received, has been extended and clarified as a result of discussion with business and professional advisers. Therefore, I hope that it is not going to cause difficulty.
The Government amendments extend protection to encompass a small number of groups holding capital losses that the targeted anti-avoidance rule might not otherwise affect, and ensure that we retain a high level of protection against some rather aggressive tax avoidance, whereby one group of companies seeks to reduce its tax liability by buying the capital losses of another. I commend those amendments to the Committee.
Amendments made: No. 80, in clause 31, page 23, line 7, at end insert—
‘(ca) after that paragraph insert—
“(ca) no qualifying change of ownership occurs at any time in relation to the principal company of that group for the purposes of section 184A of TCGA 1992 directly or indirectly in consequence of, or otherwise in connection with, any arrangements the main purpose, or one of the main purposes, of which is to secure a tax advantage falling within subsection (1)(d) of that section, and”,’.
No. 81, in clause 31, page 23, line 34, at end insert
‘; but the amendment made by subsection (5)(ca) has no effect in relation to disposals made before 9th May 2007.’.—[Mr. Timms.]