Schedule 12

Finance Bill – in a Public Bill Committee at 10:45 am on 9th June 2009.

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Reallocation of chargeable gain or loss within a group

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

I beg to move amendment 18, in schedule 12, page 128, line 5, at end insert—

‘(1A) In determining for the purposes of subsection (1)(c) whether subsection (1) of section 171 would have applied, it is to be assumed that subsection (1A)(b) of that section read—

“(b) that, at the time of the disposal, company B is resident in the United Kingdom, or carrying on a trade in the United Kingdom through a permanent establishment there.” ’.

It is a real pleasure to serve under your chairmanship, Mr. Hood. At the 2007 pre-Budget report the Chancellor launched three reviews involving the Treasury and Her Majesty’s Revenue and Customs working in partnership with business to evaluate how a range of tax legislation could be simplified. Clause 31 and schedule 12 deliver the first simplification measure from one strand of that project, which deals with the capital gains of groups of companies.

The corporation tax system allows limited offsetting of the capital losses of one company against the gains of another when calculating their taxable profits. In the Finance Act 2000 that procedure was liberalised, so that an asset could be deemed to have been transferred within the group before an onward sale. That saved the administrative burden and expense of making an actual intra-group transfer. However, those rules do not allow all gains and losses to be deemed as transferred within a group; they only apply to the sale of an asset to a third party. That means that the rules do not apply when a gain or loss results from the liquidation of a group company or when a loss arises on the making of a negligible value claim. Losses on assets that have been destroyed, or gains from insurance receipts in such a situation, are also outside the scope of this otherwise useful tax measure.

The CBI in particular highlighted in its recent Budget representations that those restrictions can be administratively burdensome. Schedule 12 provides groups of companies with a simpler procedure to offset chargeable gains with allowable losses by removing those restrictions. Rather than deeming assets to be transferred intra-group prior to a third-party sale, companies will be able to elect for a capital gain or loss to be reallocated to another group company that is within the charge to corporation tax.

Amendment 18 addresses one area in which we have received representations that, because of a technical defect in the schedule, the policy aim might not be achieved. The issue only affects groups that wish to transfer a gain or loss to a non-resident company in a group that trades in the UK through a permanent establishment—a branch or agency here. Since 2000, non-resident companies have been treated as part of the capital gains group. Tax-neutral transfers of assets can be made to a non-resident company if it has a permanent establishment in the UK and the assets are used for the business of that establishment. That rule ensures that the treatment applies only to those assets on which the non-resident company will be chargeable to corporation tax on gains made from their disposal. That same  condition is imported into the rules in schedule 12, but we have received representations from the Law Society that the new rule needs to be adapted further to operate properly when a non-resident company is involved.

When an election is made to transfer a gain or loss from the disposal of an asset to a non-resident company, the schedule already has a rule to ensure that a gain or loss on the asset will be a chargeable gain or an allowable loss to the non-resident company. That applies even where the asset would not otherwise be a chargeable asset for the non-resident company. However, the representations that we have received point out that one condition to be satisfied before an election can be made is that the asset is used in the UK trade of the permanent establishment, which is unnecessary in this context. Amendment 18, therefore, adapts the rule about when companies can make an election, to remove any doubt that non-resident companies with UK permanent establishments can always fulfil the conditions. I am grateful for the Law Society’s representation, which is one that the Government are happy to act on.

The changes made by the schedule sweep away some restrictions that have prevented the full matching of capital gains and losses within groups and simplify the complex rules that deal with group relationships. That is the kind of simplifying change that the CBI and other representative bodies have long sought. I commend the amendment to the Committee.

Amendment 18 agreed to.

Question proposed, That the schedule, as amended, be the Twelfth schedule to the Bill.

Photo of Mark Hoban Mark Hoban Shadow Minister (Treasury)

I have a couple of quick questions for the Minister about the schedule, which arise from representations made by outside bodies. The first is about capital gains and losses that arise as a consequence of the operation of foreign exchange matching rules. The Institute of Chartered Accountants has expressed the concern that these seem to fall outside the scope of the schedule. It believes that they should fall within it, as those gains and losses accrue as a result of the operation of statutory provisions. Can the Minister comment on that?

There is concern about the drafting of new sections 171A(5) and 179A(5) to the Taxation of Chargeable Gains Act 1992 inserted by schedule 12. We have received comments that they would totally negate an election. We would have thought that the correct result would be that they would negate an election to the extent that it took the total amount over the actual gain or loss. There would be a difficulty if there were two or more simultaneous elections that transferred parts of the same gain or loss to two or more different companies, so there would be a choice as to which election to negate, but where there is no choice, surely the election should be reduced rather then simply negated.

Photo of Ian Pearson Ian Pearson Parliamentary Under-Secretary (Economic and Business), Department for Business, Enterprise & Regulatory Reform, Economic Secretary (Economic and Business), HM Treasury

On the question of foreign exchange, the reference in the schedule to “in respect of an asset” will exclude chargeable gains or losses in respect of liabilities such as those arising from forex hedging from the  provision. The treatment of such gains and losses within the Exchange Gains and Losses (Bringing into Account Gains or Losses) Regulations is already under consideration in the forex matching discussions that are ongoing between HMRC and business representatives, and we have talked to business representatives about this. We intend to address that point in the next round of forex matching changes later in the year. Proceeding in that way will ensure that the whole regime is considered, rather than that one item being taken out of context. The industry is satisfied with the approach that we are taking.

The hon. Gentleman’s second question was on multiple elections. It is correct that where two or more elections are made simultaneously that specify more than the gain or loss, none of those elections has effect, as a result of the new wording of new section 179A(5). The main issue that the new subsection addresses is the possibility of simultaneous elections where a subsequent election is made in respect of the same gain or loss. HMRC expects that it will be very rare for a group to make such an oversight. On the rare occasions that an oversight may happen, it is right that the group is able to submit correct elections that specify where it wants the gain or loss to go, rather than be subject to a statutory rule that may not achieve the best result on a case-by-case basis.

Question put and agreed to.

Schedule 12, as amended, accordingly agreed to.

Clause 32 ordered to stand part of the Bill.