I return to what I was saying on schedule 10 and what the problem wasleasing companies that typically show a period of tax loss at the beginning of the lease. As tax deductions exceed the taxable rental income and this timing benefit reverses subsequent periods as the tax deductions reduce compared to the taxable rental income, selling the company to a loss-making group before the period of taxable profits begins enables the future, or deferred tax liability that would otherwise arise, to be avoided. The consequence was that the legislation was not sufficient to cover complex transactions involving leasing businesses by companies who are run in partnerships or consortiums. I understand that the provisions in schedule 10 now address some of those problems. That is confirmed by the Budget note:
Changes will be made to ensure that companies carrying on a leasing business in partnership benefit from the full amount of relief due as a consequence of an increase in their interest in the business and to prevent a charge being calculated when a partnership is dissolved or ceases to carry on a leasing business. Where there is an intra-group transfer involving a lessor company owned by a consortium the measure similarly prevents the calculation of a charge.
A number of issues have been raised on this. The initial representations suggest that the new rules proposed in schedule 10 would make it more difficult to sell a leasing business to a company with no UK tax capacity, such as an infrastructure fund or a European trader with no UK operations. Since the proposals in the Bill might impede parts of the leasing sector in this country, would it not be better to have some sort of tax avoidance motive test, rather than the proposals set out in schedule 10? That might help, encourage the leasing industry and avoid the suggestion that it would be difficult to sell some leasing companies to companies with no UK tax capacity.
The schedule makes changes to schedule 10 of the Finance Act 2006. We have managed to align schedulesone schedule 10, in the Bill, is replacing another schedule 10, which is a kind of balance that is rarely achieved in Finance Bills, but makes things slightly confusing. New schedule 10 replaces old schedule 10 in the same lessor companies legislation.
The 2006 legislation addressed a long-standing pattern of avoidance involving the sale of a lessor company at a point when the business was about to become tax- profitable. It has provided valuable Exchequer protection since it came into effect in 2005; it has been a highly effective closure of a major tax loophole. However, the leasing industry has drawn it to our attention that, in exceptional circumstances, the legislation may be affecting normal commercial transactions. Where the relief provided for under schedule 10 of the Finance Act 2006 cannot be used immediately, its value to the buying group is reduced potentially in feeding in normal commercially motivated transactions. Part of the difficulty is that a lot of the companies are run by banks, and banks are not exactly in profit at the moment. That is where some of the difficulty has arisen. I suspect that in 2006, when the arrangements were drawn up, the problems that banks are having now with their profitability were not anticipated. It is something that has come out of that circumstance. The schedule makes changes to preserve the value of the schedule 10 relief when not utilised immediately. At the moment the non-profitability of some of the companies that are buying or selling is an issue that has adversely affected activity in this particular market.
The schedule also removes anomalies affecting the treatment of leasing businesses carried on by companies in partnership and by companies owned by consortiums, ensuring that the legislation operates fairly in all circumstances. The hon. Gentleman recognised that in his remarks. Proposals for change to deal with the issue were presented in a discussion document published in July 2008. Draft legislation was published for comment with the Budget.
The hon. Gentleman raised the difficulties of selling to infrastructure funds. The Bill has no effect on the sale to infrastructure funds. The issue was known about last year. I can tell him that we are in discussions with the industry about how we can deal with the issue, so it is not dealt with in the Bill, but we are aware of it and are discussing it. I hope that he will acknowledge that the changes in schedule 10 work for the benefit of the industry in trying to maintain an important market through these difficult times. Clearly, we shall also apply such an approach to our review relating to the sale to infrastructure funds in order to give the assistance that is appropriate for that particular and important market. I hope that, with that reassurance, the Committee will agree to make schedule 10 part of the Bill.