I beg to move amendment 105, in schedule 15, page 149, line 20, at end insert
(4A) Part 5A contains rules connected with tax avoidance..
In my remarks a few moments ago, I indicated the background to this series of Government amendments. I apologise to you, Mr. Hood, and to the Committee, because I will need to take a little time to explain what is happening and the reasons for the measures.
The debt cap principle is simple in concept, as we discussed. It requires comparison of the interest and other finance expense payable in the UK by a groups net interest-paying companies, which is referred to as the tested expense, with the consolidated gross finance expense payable by the worldwide group, which is referred to as the available amount. When the tested expense amount exceeds the available amount, the excess is disallowed for tax purposes. If other UK group companies have net interest receipts, the equivalent amount of those receipts becomes non-taxable, to prevent, effectively, double taxation.
The legislation is targeted at abuse of generous UK rules on deductibility of interest by multinational businesses. For that reason, it applies only to large businesses and companies for which the net interest expense exceeds £500,000, so many companies will not need to consider the debt cap legislation at all.
The debt cap can apply to both inbound and outbound investors, but it can also count as exploitation of the interest relief rules when upstream loans are made to the UK parent by its subsidiaries. Not all upstream loans are offensive, as we were saying before lunch, but some are tax-driven, with the interest payment removing profits from the scope of UK taxation and with the interest receipt arising in a company where it is effectively either not taxed or taxed at a low rate.
The legislation contains a number of exclusions which, taken with the other changes that we have made, ensure that the debt cap is carefully targeted. I will go into some of those in more detail, but I shall first list them. First, the financial services exclusion recognises that the different role of debt in financial groups is being introduced by amending the Bill. Secondly, there is a group treasury exclusion, which applies where group companies lend money to a UK group treasury company and that company then lends on the money at profit. Thirdly, there is a short-term debt exclusion, which recognises that short-term upstream loans are not likely to be tax-driven but are made to enable groups to manage their short-term cash position better, for example by allowing a group to operate a cash pooling arrangement to reduce banking costs.
Fourthly, there are exclusions for companies within the ring-fenced oil regime, the shipping tonnage tax regime and the real estate investment trust regime, as the regimes already address the taxation of those activities. Finally, there are exclusions to deal with payments of finance expense by trading subsidiaries to their UK parent where that is a charity or some other exempt body.
Two of the exclusions deserve a bit more explanation. The financial services exclusion applies when substantially all of a groups income or the income of UK members of the group derives from a particular financial services activity. Banks, for example, borrow at interest so they can lend to their customers, and it would be inappropriate to apply the debt cap to them. As I said in my letter of 30 April, the financial services exclusion was not included in the Bill at publication, as we wanted more time to ensure that our proposals were effective and discuss them with those affected. The exclusion is now being introduced by way of Government amendments.
The group treasury exclusion is appropriate because in cases where group companies provide internal lending facilities for other members of the group and manage cash pooling arrangements on behalf of the group, the facilities provided by the group treasury company generate UK-taxable profits rather than removing profits from the scope of UK taxation. The exclusion is therefore appropriate.
Schedule 15, as we were discussing, includes a gateway test. If it is satisfied, a group need not consider the application of the debt cap rules any further for the accounting period concerned. I should mention in passing that the legislation requires anti-avoidance rules to deter companies from entering into or being party to schemes that seek to prevent the operation of the debt cap. The rules were not included in the Bill on publication, again so that we could have more time for discussion. They, too, are now being introduced by way of Government amendments.
Earlier, we discussed the implementation date for the debt cap. As I said, after discussions with business, the debt cap legislation will apply to accounting periods beginning on or after 1 January 2010. I should make that point clear: it applies to accounting periods starting on or after that date. That means that we have removed the need for companies to apportion the results of an accounting period, as would be required if the debt cap legislation simply applied with effect from a particular date. If it applied from 1 January 2010, any accounting period straddling that date would require apportionment, which would be complicated. We have avoided that difficulty. The implementation date also provides an interval following the introduction of dividend exemption that enables groups to pay up dividends and then unwind upstream loans, and it allows businesses time to become familiar with the legislation.
Our amendments to the design of the debt cap, which I am about to explain in more detail, will result in a simpler regime with greater scope for business to avoid the impact of the debt cap. Without anti-avoidance rules, groups that would pay additional corporation tax as a result of the debt cap might rearrange their borrowings to avoid the rules. Although the same borrowings might remain in substance, the form of the borrowing and other arrangements could reduce the UK net finance expense amounts or increase the worldwide figure of gross finance expense.
The anti-avoidance rules are split into three parts. The first part counters schemes intended to arrange for the group to satisfy the gateway test. The second part counters schemes intended to secure that the available amount, the worldwide group gross finance expense, is greater than it otherwise would be; or that the tested expense amount is less than it would otherwise be; or that the amount of financing income exempted for UK group companies is greater than it would otherwise be. It also counters schemes where a UK company is a beneficiary of the scheme but is not actually a party that has transactions that make up the scheme. Again to ensure that the debt rules are compliant with EU law, the debt cap allows UK companies to exempt financing income received from another group company resident in another part of the European economic area, where that company is subject to a disallowance or that payment in its own country of residence. The third part of the anti-avoidance rules ensures that the amount of financing income that can be exempted by a UK company cannot be increased as a result of an avoidance scheme.
Each of these anti-avoidance rules incorporates a purpose test, providing that the rules apply only where the main purpose, or one of the main purposes, of the scheme is to secure a result that frustrates the intention of the debt cap rules. The scope of the schemes potentially caught by the rules is necessarily wide. The alternative would be to attempt to define the schemes that might be put in place to frustrate the debt cap rules, but it would be very difficult to anticipate all the potential avoidance schemes. The approach we have taken is the right one, but we recognise that some schemes will feature arrangements that are not designed to frustrate the debt cap rules. We have addressed that by providing that if the profits of the UK members of the group are greater or the losses lower than they would be if the arrangements were not in place, the anti-avoidance rules will not apply.
HMRC will be available to define, by regulation, schemes that consist of particular types of arrangements or schemes bearing particular hallmarks that will not be subject to the anti-avoidance rules. HMRC expects to develop those in discussion with companies. The new targeted anti-avoidance rules for the debt cap are inserted by way of a new part to schedule 15, requiring Government amendment 105 to update the overview in part 1 and Government amendment 116 to insert the new part.
The provisions as published already contain a targeted anti-avoidance rule, at paragraph 68(7) and (9), to prevent a UK group company from being artificially removed from the scope of the debt cap. I have mentioned that such a scheme will be caught by rules introduced through Government amendment 116. That allows for the existing rule to be removed, and Government amendments 138 and 139 achieve that.
In response to calls from business, the debt cap now applies to a group for its first accounting period beginning on or after 1 January 2010. We would expect a group with an accounting period due to end on 31 December 2009 to apply the debt cap measures with effect from 1 January 2010. However, such a group could shorten its accounting period by one day to 30 December 2009 and the debt cap would not apply till the following accounting period, which starts on 31 December 2009. We want to stop such forestalling activity. The change to the commencement date made to accommodate businesses therefore requires us to introduce Government amendments 152 and 153 to counter such activity. The amendments move the commencement day for the debt cap rules forward where a group changes its accounting period and the main purpose, or one of the main purposes, of doing so is to delay the application of the debt cap.
On Government amendment 157, consequential changes are required to prevent double taxation. The debt cap disallows some finance expense where the net finance expense of the UK members of a group exceeds the groups gross external finance expense. In some cases, the finance expense disallowed may be interest payable to an overseas subsidiary of a UK group company that is taxable on the UK parent company under the controlled foreign company rules. To prevent effective double taxation, Government amendment 157 adds new rules to the CFC legislation that will allow a group to apply for otherwise taxable CFC profits that are apportioned to a UK group company to be consequentially reduced.
Government amendment 151, on UK transfer pricing rules, applies the arms-length principle so that finance expense payable by a UK group company to another group company can be claimed as a deduction only if it is the amount that would have been payable to a third party. Equally, financing income receivable by a UK group company from another group company must reflect the amount that would have been receivable if it had come from a third party.
The debt cap can result in finance expense being disallowed and financing income exempted. It is possible in some cases that the transfer pricing rules could reinstate such adjustments. To address that problem, we need to make clear that the debt cap rules operate after any necessary adjustments under the transfer pricing rules have been made. Government amendment 151 makes a change to the transfer pricing rules that makes the primacy of the debt cap rules explicit.
I apologise to the Committee for having taken up so much time with that explanation, but I hope that I have made clear our reasons for tabling the new anti-avoidance provisions at this stage. They have been widely discussed and considered, and I hope that the Committee will be happy to accept the Government amendments.
I am grateful to the Minister for his explanation of the amendments and the general background. I wish to put one point on record at the start. It is a complaint widely voiced by professional advisers, who are concerned about the raft of amendments being tabled at this stage. I understand that some were circulated in draft form in the middle of last week, but they were tabled formally only on Thursday. A number of people to whom I have spoken over the past few days expressed concern that they have not necessarily got to the bottom of the changes, and that further issues may need to be resolved. It is a pity that we have to discuss the amendments so soon after their publication. I suspect that we may see further amendments being made on Report, or even that the matter will have to be revisited in next years Finance Bill, as people work their way through some of the changes.
I shall speak first about the anti-avoidance measures. The Minister says that they are targeted measures, but there is some concern they are not targetedthat they are instead quite broad in their approach. The Minister said that the Treasury wanted to avoid being too specific, so that people did not try to get around detailed provisions, but I wonder whether we have gone to the other extreme. What sort of activities can businesses undertake to reduce their tax charge that will be deemed reasonable by HMRC? One expects taxpayers, when confronted with a higher tax bill as a consequence of such provisions, to take steps to reduce their tax bill. It is something that most of us would do, and I believe that companies will look to restructure their external debt to reflect the provisions.
A number of issues create the backdrop to the change. The fact that the gateway test is much narrower than anticipated is a problem, as is the fact that the net receivables of a company cannot be offset against net debt in other group companies. I believe that people would try to structure their activities so that they could be netted off in the same company if no exemption were available to match those amounts in the group as a whole. Would HMRC expect to see and be happy with that level of restructuring in the run-up to commencement, with tidying up going on to get net receivables under the maximum debt in the same company in order to enable that offset?
The other aspect is the exemptions referred to by the Minister in the anti-avoidance clause to be inserted under Government amendment 116. New paragraphs 38B to 38E will prevent groups from structuring their financing so as to minimise any disallowance that they could suffer as a result of applying the debt cap legislation, unless the arrangement meets the definition of an excluded scheme. In trying to get to that point, however, some of the decisions that businesses need to review require a group to look at some hypothetical comparator transactions and deduce which of them it would be more likely to undertake in the absence of the debt cap rules and then calculate the test of debt expense, the available amount, the test of income amount and the groups profits chargeable to tax that would arise if the hypothetical transaction had taken place. That is covered in new paragraph 38D(2)(b), which says:
instead, anything that is more likely than not would have been done or not done had this Schedule not had effect in relation to the relevant period of account, was done or not done.
That may be perfect drafting from a parliamentary draftsmans point of view, but I am not entirely sure what would be required unless someone explained it to me. However, there appears to be a test of looking at how a company might have acted if the rules had not been in place. I question whether the anti-avoidance measures are sufficiently opaquesorry, I mean sufficiently transparent, although they are certainly opaqueto enable businesses to take reasonable decisions on how to restructure their affairs legitimately to take the new rules into account. There may be a raft of potential comparative transactions that a business could undertake, so how can a business prove to HMRC that it can satisfy the provisions outlined in new paragraph 38D(2)(b)? I think that the measure will cause some problems to business.
We need to think about quite carefully the breadth of the measure, including what sort of transactions it might inadvertently capture. For example, there might be a scheme whereby an inbound investor is debt financing a machinery replacement programme in its UK subsidiary to increase production and thereby increase UK profits. However, if an investor decides to reduce the amount of financing that is to be provided so that the cost of capital is not increased by a disallowance under the debt cap, conditions A and B of new paragraph 38B might well have been met, because one of the investors main purposes was to ensure that there was no disallowance under the debt cap, and UK profits would be lower than they would otherwise have been because less machinery is in place and consequently production and profits are not as high as they would have been if the full replacement programme had been implemented.
We assume that such a transaction is not the target of the anti-avoidance provisions. It is not an unreasonable transaction to undertake, but it would appear to satisfy conditions A and B of new paragraph 38B, so one would assume that it would fall within the definition of an excluded scheme. Again, the breadth of the measures is causing part of the problem. The definition of an excluded scheme is actually quite important in establishing what is intended to be targeted by the anti-avoidance provisions and what is not intended to be targeted.
We understand that the excluded schemes will appear in secondary legislation. However, until we have a chance to look properly at that secondary legislation, which is being consulted upon, it is very hard to know what schemes will fall inside or outside the anti-avoidance provisions of the Bill. This is an important issue, because a number of groups will seek to use the period between now and the commencement of the regime to look at the nature of their activities, to decide what their financial arrangements should be and to see whether they may be caught by what appears to be quite a broad-brush anti-avoidance rule.
There has been a great deal of discussion with businesses over the past couple of years about everything that we are considering this afternoon, including how anti-avoidance should be handled. I do not want the Committee to get the impression that this measure has come out of nowhere, hence my statement that there has been a lot of discussion leading up to this point in the process.
The anti-avoidance rules have indeed been designed with a wide scope. That is to ensure that all schemes designed to frustrate the intention of the debt cap rules are caught. I made the point earlier that the alternative would have been to identify specific schemes that would be caught by the rules, but that would have run the risk of not catching schemes that nobody had thought of, or because specified schemes were changed before being used. However, the anti-avoidance rules contain filters that will ensure that they apply only to those schemes that are intended to frustrate the debt cap rules.
The hon. Member for Fareham asked how a company is supposed to establish the most likely outcome if the anti-avoidance rules apply, and what its profits ought to be. In many cases it will be straightforward to work out the most likely outcome. For example, when the avoidance is targeted at increasing the gross consolidated finance expense of the group while leaving the borrowing costs associated with that scheme more or less unchanged, the most likely alternative outcome will be to ignore the increase in those expenses. I do not know whether the hon. Gentleman will find this reassuring, but HMRC will in due course publish guidance to help to explain the factors that need to be taken into account and assessed when establishing the most likely alternative outcome. As it develops the guidance, HMRC will certainly talk to businesses about that, and in cases of real difficulty, which I think will be rare, it will be happy to discuss the most likely outcome with the group.
We cannot allow set-off between group companies because that would not be EU-law compliant. However, putting receipts of interest into the company with expense is not offensive, because the company then does not have so much interest expense to claim as a deduction.
As I said, we will publish detailed draft guidance before the Bill receives Royal Assent, and will discuss it with businesses. That will help us to come up with specific examples that should not be caught, which might be helpful in some of the situations that the hon. Gentleman has in mind.
I am not hugely reassured by the statement that HMRC will produce guidance. There were various attempts during last years Finance Bill to get HMRC to produce guidance, which effectively would have enabled people to be taxed by legislation but untaxed by guidance. There is a lot of concern about that approach among tax professionals more broadly. They are concerned that guidance does not have statutory force, does not necessarily have to go through a proper consultation process, and offers less security to taxpayers than primary or even secondary legislation.
The Minister should not be in any doubt that people will be content if guidance is published, but it is better to get primary and secondary legislation right than to tax people by guidance. Will he reassure the Committee that regulations will be introduced to define excluded schemes and that the guidance will give the context of what schemes are deemed to be excluded? It might give a bit more certainty to taxpayers if the guidance is simply an elaboration of what is in secondary legislation, rather than something that exists independent of it.
We will publish the detailed draft guidance before Royal Assent and discuss the content with business. HMRC will consult with business to consider particular schemes that are not intended to frustrate the debt cap rules. It will then consider whether such a scheme can be defined by, for example, particular hallmarks that characterise a scheme, which we can set out up front by outcome or by other criteria, and then publish draft regulations for comment. The intention is to achieve a progressive process with excluded schemes added over a period.
On the general principle of specifically outlawing schemes rather than having a wider catch-all, is it not better to have specifically outlawed schemes, so that taxpayers know where they stand? Is it not the role of Government to outwit the accountants each year? What will happen is that accountants will look at the provision and try and get round it, and we will be back here again next year outlawing schemes in the next Finance Bill. By specifying schemes, one can at least argue with some certainty, rather than going off to tribunals or court cases.
I think the hon. Gentlemans argument actually supports the approach that we have taken. He is absolutely right: some very ingenious people will no doubt try to find a way round some of the provisions. However, if the approach we took was to try to work out what kind of schemes might be dreamt up and then list them all or set them all out in the legislation, that would be an invitation to someone to think of a slightly different version, or to come up with something new. It is therefore better to design the anti-avoidance rules as we have done, with a wide scope, so that all schemes that are designed to frustrate the intention of the debt cap rules are caught. He is right about the ingenuity that will be applied, but I think that the conclusion he draws is not correct. It is better to have the wide scope that allows us to deal with whatever is invented.
I beg to move amendment 106, in schedule 15, page 150, line 1, at end insert
(1A) But a period of account that is within sub-paragraph (1) is not a period of account to which this Schedule applies if the worldwide group is a qualifying financial services group in that period (see paragraph 6A)..
I can be a bit briefer with this group of amendments, as I have already set out the aim of the debt cap legislation. I mentioned that some businesses cannot operate without the use of debtfor example, banks borrow from their depositors to lend on to customersand the debt cap has never been intended to apply to businesses for which debt is integral to what they do. The draft clauses published in December contained exclusions for financial business where debt was an integral part of that business, but subsequent discussions established that those rules, as set out at that time, would have been very difficult to operate in practice.
In my 30 April letter, we explained to the financial services industry why the Bill would not exclude this exclusion on publication. We have been working with business to develop workable solutions since then. The new financial services exclusion rules work by excluding a group as a whole from being subject to the debt cap where substantially all of the groups income, or the income of UK members of the group taken together as a mini consolidated group, is derived from qualifying activities. In that context, substantially all will be taken to mean around 90 per cent. Qualifying activities are lending business, insurance businesses and trading in financial instruments. The rules recognise the need for flexibility so that they can be applied by financial services groups in a straightforward way. The rules allow groups to take account of other types of income generated by way of the qualifying activities and deal with cases in which some of those activities might produce losses. The amendments introduce the financial services exclusion in a form that delivers the intended policy, while rightly excluding financial services businesses. It is also practical for the industry.
The Minister is right that these are important amendments. Last year, when I discussed the debt cap with those in the banking sector, this was identified as being an important issue to get right, because of the nature of their financing. I want to raise some issues that have been brought to my attention in the relatively short time since these clauses were published. Some of them have been discussed with the Treasury already.
The first issue relates to qualifying activities. To qualify for the exemption, all or a substantial amount of a groups income must be aimed at qualifying activities. The Minister said that that means 90 per cent. of the groups income must be in a qualifying activitya proportion used elsewhere, I think. However, that means that groups with a combination of qualifying and non-qualifying activities might have a problem. Let us consider how some businesses in the financial services sector are currently developing. For example, retailers are increasingly moving into financial services. The financial services income might constitute a relatively small proportion of a groups total income, which means that it would not qualify under this exemption because neither all nor a substantial part of its income will derive from a qualifying activity. The vast majority will come from retailing, selling petrol or whatever. This provision might place an extra burden on groups seeking to diversify into financial services and act as a barrier, or a further disincentive, to them doing so.
I understood that, at one stage, the Treasury or HMRC were considering an exemption that would enable them to ring-fence sub-groups wholly engaged in qualifying activities as a means of getting around this particular issue. I would be grateful if the Minister could explain why that route has not been pursued and why the level has been set at such a high level of 90 per cent. I hope that this does not, as has been suggested, take us back to our old friend EU rules. My first concern, therefore, is about what happens with hybrid groups. Can the rules be amended to reflect the diversity of some groups involved in some financial services and other activities?
The second concern relates to the treatment of insurance premiums. The Minister will be aware that premiums on investment contracts will be accounted for in a groups balance sheet, rather than its income statement. Will those premiums be included in the gross income test under proposed new paragraph 6G(3)(B)? My understanding is that that point has been made and accepted by HMRC but is not reflected in the drafting of the amendment.
My second point on insurance premiums relates to the way in which they are disclosed in sets of accounts. Looking at the gross income for the debt cap test, will the Treasury expect insurers to report their premiums gross of reinsurance premiums, as that would be the appropriate measure for discerning the gross income test? As I understand it, as a matter of presentation several insurers show their turnover net of reinsurance premiums but disclose by way of note the gross premium. Could the Minister clarify how insurance companies will be able to calculate their gross income? The substantive point that concerns me at present is the question of how the exemption for financial services will take into account those groups whose financial services activity is perhaps a significant element but nowhere near the 90 per cent. test the Government have set out in the schedule and in the amendments.
I will deal first with the 90 per cent. limit and the substantial requirement. As the hon. Gentleman has said, that proportion is referred to elsewhere. It is needed is ensure that the exclusion is not treated as a state aid under EU rules. Some groups could well be in the position he described by essentially having a retailing business, but also an identifiable finance arm. When groups are in that position, it is possible that the whole group will be excluded through the application of the gateway test. Therefore, we took the view that introducing rules to deal with such cases in the legislation would be pretty complicated if we were to ensure that those rules were not then used for avoidance purposes. It is likely that no such groups will have to apply the main rules, so we do not think that there is a need to introduce additional rules.
With regard to income from insurance premiums taken as income that is gross before any reinsurance or net after reinsurance, for the purposes of calculating the trading income and income from qualifying activities the income is taken as gross, before any premiums ceded in respect of reinsurance. On the question of what happens if income is not normally reported as income in the income statement profit and loss account but is taken to the balance sheet, for example with premiums from investment contracts, the rules refer to income that is accounted for as such under accounting practice or principles where amounts receivable have the nature of income but for particular insurance accounting purposes are taken to the balance sheet. Those amounts will be treated as income for the purposes of applying the financial services exclusion rules.
Going back to the hybrid point, and the question of whether we could ring-fence sub-groups, that would require very complicated rules to achieve that and also to ensure that the exclusion was not exploited by groups for whom it was not intended. That is the reason we have not set out rules to ring-fence finance sub-groups.
I beg to move amendment 107, in schedule 15, page 151, line 10, leave out finance income payable and insert liabilities.
The gateway test we mentioned is a comparison of specific amounts of debt and cash and loan receivables from balance sheets of the UK members of a group and of the group itself. Each figure is the average of the opening and closing balance sheet figures. If the measure of total net debt of the UK members of the group that themselves have net debt is less than 75 per cent. of the gross debt of the group, the group does not have to apply the rest of the debt count rules for that accounting period. If a UK company has net debt of less than £3 million, it is not included in the calculation of UK net debt either.
In making the comparison, the terms that define liabilities and receivables in respect of finance leases do not work as intended. Amendments 107 to 109 put that right.
In some circumstances groups prepare accounts in a currency other than sterling, so the gateway test can be applied by reference to a groups functional currency rather than sterling. Amendments 111 to 113 in the grouping address how, in that case, the £3 million de minimis is translated to the functional currency.
The amendments ensure that the gateway test works as intended in those cases in which a group is involved in financial leasing businesses and where a group has adopted a functional currency other than sterling.
Amendments made: 108, in schedule 15, page 151, line 19, leave out finance income receivable in respect of and insert
net investments, or net cash investments, in.
109, in schedule 15, page 151, line 38, leave out finance income payable and insert liabilities.
110, in schedule 15, page 152, line 28, at end insert
Qualifying financial services groups
6A (1) The worldwide group is a qualifying financial services group in a period of account if the trading income condition
(a) is met in relation to that period, or
(b) is not met in relation to that period, but only because of losses incurred by the group in respect of activities that are normally reported on a net basis in financial statements prepared in accordance with international accounting standards.
(2) The trading income condition is met in relation to a period of account if
(a) all or substantially all of the UK trading income of the worldwide group for that period, or
(b) all or substantially all of the worldwide trading income of the worldwide group for that period,
is derived from qualifying activities (see paragraph 6B).
(3) In this Part, in relation to a period of account of the worldwide group
UK trading income means the sum of the trading income for that period of each company that was a relevant group company at any time during that period (see paragraph 6F);
worldwide trading income means the trading income for that period of the worldwide group (see paragraph 6G).
6B In this Part qualifying activities means
(a) lending activities and activities that are ancillary to lending activities (see paragraph 6C),
(b) insurance activities and insurance-related activities (see paragraph 6D), and
(c) relevant dealing in financial instruments (see paragraph 6E).
Lending activities and activities ancillary to lending activities
6C (1) In this Part lending activities means any of the following activities
(a) acceptance of deposits or other repayable funds;
(b) lending of money, including consumer credit, mortgage credit, factoring (with or without recourse) and financing of commercial transactions (including forfeiting);
(c) finance leasing (as lessor);
(d) issuing and administering means of payment;
(e) provision of guarantees or commitments to provide money;
(f) money transmission services;
(g) provision of alternative finance arrangements;
(h) other activities carried out in connection with activities falling within any of paragraphs (a) to (g).
(2) Activities that are ancillary to lending activities are not qualifying activities for the purposes of this Part if the income derived from the ancillary activities forms a significant part of the total of
(a) that income,
(b) the income derived from lending activities of the worldwide group in the period of account.
(3) In sub-paragraph (2) income means the gross income or net income that would be taken into account for the purposes of paragraph 6A in calculating the UK or worldwide trading income of the worldwide group for the period of account.
(4) The Commissioners may by order
(a) amend sub-paragraph (1), and
(b) make other amendments of this paragraph in consequence of any amendment of sub-paragraph (1).
(5) In sub-paragraph (1)(h), and in the references to ancillary activities in this paragraph and paragraph 6B(a), activities includes buying, holding, managing and selling assets.
(6) In this paragraph alternative finance arrangements has the same meaning as in Chapter 6 of Part 6 of CTA 2009.
Insurance activities and insurance related activities
6D (1) In this Part insurance activities means
(a) the effecting or carrying out of contracts of insurance by a regulated insurer, and
(b) investment business that arises directly from activities falling within paragraph (a).
(2) In this Part insurance-related activities means
(a) activities that are ancillary to insurance activities, and
(b) activities that
(i) are of the same kind as activities carried out for the purposes of insurance activities,
(ii) are not actually carried out for those purposes, and
(iii) would not be carried out but for insurance activities being carried out.
(3) Sub-paragraph (2) is subject to sub-paragraph (4).
(4) Activities that fall within sub-paragraph (2)(a) or (b) (the relevant activities) are not insurance-related activities if the income derived from the relevant activities forms a significant part of the total of
(a) that income,
(b) the income derived from insurance activities of the worldwide group in the period of account.
(5) In sub-paragraph (4) income means the gross income or net income that would be taken into account for the purposes of paragraph 6A in calculating the UK or worldwide trading income of the worldwide group for the period of account.
(6) In this paragraph
activities includes buying, holding, managing and selling assets;
contract of insurance has the same meaning as in Chapter 1 of Part 12 of ICTA;
regulated insurer means a member of the worldwide group that
(a) is authorised under the law of any territory to carry on insurance business, or
(b) is a member of a body or organisation that is so authorised.
Relevant dealing in financial instruments
6E (1) In this Part financial instrument means anything that is a financial instrument for any purpose of the FSA Handbook.
(2) For the purposes of this Part, a dealing in a financial instrument is a relevant dealing if
(a) it is a dealing other than in the capacity of a broker, and
(b) profits or losses on the dealing form part of the trading profits or losses of a business.
(3) In this paragraph broker includes any person offering to sell securities to, or purchase securities from, members of the public generally.
UK trading income of the worldwide group
6F (1) This paragraph applies in relation to paragraph 6A for calculating the UK trading income of the worldwide group for a period of account.
(2) The trading income for that period of a relevant group company is the aggregate of
(a) the gross income calculated in accordance with sub-paragraph (3), and
(b) the net income calculated in accordance with sub-paragraph (4).
(3) The income referred to in sub-paragraph (2)(a) is the gross income
(a) arising from the activities of the relevant group company (other than net-basis activities), and
(b) accounted for as such under generally accepted accounting practice,
without taking account of any deductions (whether for expenses or otherwise).
(4) The income referred to in sub-paragraph (2)(b) is the net income arising from the net-basis activities of the relevant group company that
(a) is accounted for as such under generally accepted accounting practice, or
(b) would be accounted for as such if income arising from such activities were accounted for under generally accepted accounting practice.
(5) Sub-paragraphs (3) and (4) are subject to sub-paragraph (6).
(6) In a case where a proportion of an accounting period of a relevant group company does not fall within the period of account of the worldwide group, the gross income or net income for that accounting period of the company is to be reduced, for the purposes of this paragraph, by that proportion.
(7) Gross income or net income is to be disregarded for the purposes of sub-paragraph (2) if the income arises in respect of an amount payable by another member of the worldwide group that is either a UK group company or a relevant group company.
(8) In this paragraph net-basis activity means activity that is normally reported on a net basis in financial statements prepared in accordance with generally accepted accounting practice.
Worldwide trading income of the worldwide group
6G (1) This paragraph applies in relation to paragraph 6A for calculating the worldwide trading income of the worldwide group for a period of account.
(2) The trading income for that period of the worldwide group is the aggregate of
(a) the gross income calculated in accordance with sub-paragraph (3), and
(b) the net income calculated in accordance with sub-paragraph (4).
(3) The income referred to in sub-paragraph (2)(a) the gross income
(a) arising from the activities of worldwide group (other than net-basis activities), and
(b) disclosed as such in the financial statements of the worldwide group,
without taking account of any deductions (whether for expenses or otherwise).
(4) The income referred to in sub-paragraph (2)(b) is the net income arising from the net-basis activities of the worldwide group that
(a) is accounted for as such under international accounting standards, or
(b) would be accounted for as such if income arising from such activities were accounted for under international accounting standards.
(5) In this paragraph net-basis activity means activity that is normally reported on a net basis in financial statements prepared in accordance with international accounting standards.
(6) For provision about references in this Schedule to financial statements of the worldwide group, and amounts disclosed in financial statements, see paragraphs 69 to 72..
111, in schedule 15, page 152, line 39, after first currency insert (the relevant foreign currency).
112, in schedule 15, page 152, line 40, after applies insert
113, in schedule 15, page 152, line 42, leave out from the to end of line 43 and insert relevant foreign currency, and
(b) for the purposes of determining under paragraph 3 the net debt amount of a company, the reference in sub-paragraph (3) of that paragraph to £3 million is to be read as a reference to the relevant amount.
(4) For this purpose the relevant amount means the average of
(a) £3 million expressed in the relevant foreign currency, translated by reference to the spot rate of exchange for the companys start date, and
(b) £3 million expressed in the relevant foreign currency, translated by reference to the spot rate of exchange for the companys end date.(Mr. Timms.)
I beg to move amendment 114, in schedule 15, page 161, leave out line 9 and insert
(b) the lower of
(i) the total disallowed amount, and
(ii) the tested income amount..
With this it will be convenient to discuss the following: Government amendments 117 to 124.
Amendment 52, in schedule 15, page 168, line 18, after A, insert or condition B.
Amendment 53, in schedule 15, page 168, line 20, after A, insert or condition B.
Government amendment 125.
Amendment 54, in schedule 15, page 170, line 19, leave out from the finance arrangement.
Amendment 55, in schedule 15, page 171, line 10, leave out an investment company and insert a company with investment business.
Amendment 56, in schedule 15, page 171, line 11, leave out 4 of ICTA and insert 16 of CTA 2009.
Amendment 57, in schedule 15, page 171, line 17, leave out 75 of ICTA and insert 1219 of CTA 2009.
Government amendments 128 and 129.
Amendment 58, in schedule 15, page 172, line 25, leave out from first that to first a in line 26 and insert is referable to.
Amendment 60, in schedule 15, page 173, line 1, leave out from first that to first a in line 2 and insert is referable to.
Government amendments 130 to 137, 140 to 149 and 154.
This is a rather large set of Government amendments, all of them necessary to address issues arising in respect of the debt cap calculation, and to ensure that the debt cap achieves its policy aims in particular areas.
Amendment 114 concerns limiting the amount of financing income that can be exempted. Amendment 154 concerns the finance expense and income accrued before the introduction of debt cap rules. Amendments 130, 132 to 134, 140, 141 and 149 relate to capitalised borrowing costs.
There are amendments relating to the exclusion of some expenses or income from the debt cap calculations. Amendment 124 applies to real estate investment trusts, for which it has been the intention, from the outset, to exempt from corporation tax.
Amendments 117 and 118 relate to group treasury companies, amendments 119 to 123 to group treasury services and amendment 129 to already exempt non-departmental public bodies.
In addition to the Government amendments, there are a number of Opposition amendments. I shall be happy to respond to the hon. Member for Fareham after he speaks to them.
Before I move on to my amendments, I want to raise a question that has been put to me about the group treasury exemption. The Minister will doubtless be aware that in a number of groups, trading companies will participate in a cash pooling arrangement whereby balances are swept from that company into a central account overnight and transferred back. Such arrangements are considered necessary to undertake treasury activities. The income would then be allocated to that company. One of the concerns expressed to me is that, in such a situation, the trading income is likely to swamp the treasury income and probably would also swamp the income of the pure treasury company within a group in such a way that no group company would be able to qualify as a group treasury company.
It has been suggested that paragraph 42(6) should be amended so that whereas at present it includes any company that undertakes treasury activities for the worldwide group, whether or not it also undertakes other activities, that should be replaced with the exclusion
except where the main activity of that company is conducting trade.
That would reflect the fact that people may be undertaking cash pooling operations as an adjunct to the trading activity, and might be a way of ensuring that the very valuable exemption for group treasury companies is capable of being taken advantage of in those companies in which there are cash pooling arrangements.
I come now to my own amendments. Amendments 52 and 53 are quite simple. I shall explain the issue that I am trying to address. Paragraph 39 of schedule 15 defines financing expense amounts to include loan relationship debitscondition Afinance lease rentals, which is condition B, and costs payable on debt factoring, which is condition C. The definition of finance income amounts of the company includes income arising from similar transactions.
For companies engaged in oil extraction activities, finance expense takes into account amounts that are limited to loan relationship debits, and financing income takes into account only loan relationship credits. Is there a reason why companies involved in oil extraction should not be able to bring into account expenses and income relating to finance lease rentalscondition B? I should be grateful for the Ministers comments on that.
With regard to amendment 54, sub-paragraph (6) of paragraph 47 on page 170 provides for the conditions in the provision to apply to elections relating to finance expenses. It relates to carrying forward non-trading deficits from the finance arrangement. My understanding is that that is technically incorrect and should be amended. Deficits under the loan relationship regime are not specific to a relationship; they are part of a general calculation.
Amendment 55 is another fairly technical amendment. The rules that applied to the expenses of management of investment companies in part IV of the Income and Corporation Taxes Act 1988 were amended in 2004 to apply to companies with investment business as opposed to just investment companies. My amendment would insert the more up-to-date language.
Amendments 56 and 57 are drafting amendments. The references are to the Income and Corporation Taxes Act 1988. That has now been rewritten through the Corporation Tax Act 2009 and my amendments would make the cross-reference to the 2009 Act rather than the 1988 Act. The draft legislation that was published in December last year did not take into account the fact that there needs to be a proper cross-reference to the new Act.
Amendments 58 and 60 relate to the definitions in paragraphs 52 and 53 of the tested expense amount and the tested income amount of relevant group companies. The amounts covered by the definitions are not supposed to refer to periods when a company is not a member of the group. However, the relevant provisions refer to transactions that take place when a company is not a member of the relevant group and do not take account of the fact that either the income or the expense amount are calculated with reference to entries in the accounts which would normally be determined on an accruals basis. The amendments are designed to ensure that the accrued amounts are taken into account or excluded from the two definitions of tested income amount and tested expense amount, as appropriate.
Amendment 59 is another drafting amendment. The suggestion is that the definitions should refer to the whole of the schedule rather than simply to part 7. I would be grateful for the Ministers clarification of whether the drafting in the Bill is correct, or whether it should refer to the schedule rather than the part.
I am grateful to the hon. Gentleman for several of the amendments that he has proposed, and I would be happy to accept some of them. It always was our intention, as I mentioned earlier, to exclude companies undertaking oil exploration activities that are subject to specific rules from the scope of the debt cap. There was a drafting oversight, and so the provisions do not exclude finance lease charges from the operation of the debt cap. Amendments 52 and 53 put that right. I am grateful to the hon. Gentleman for them and am happy to accept them.
Amendment 54 is also helpful. It removes an erroneous limitation on identifying the deficits that can be used to determine the amount of finance expense that can be excluded from the calculation under the debt cap. I tabled an amendment that was identical in form but that was not selected. Therefore, I am delighted to accept amendment 54 and again am grateful to the hon. Gentleman for tabling it.
On amendments 55 and 56, other rules in the current clauses deal similarly with excluding financing expense amounts that are payable to group companies with excess management expenses. The rules incorrectly refer to legislation in ICTA rather than CTA 2009, as is now appropriate following consolidation. I am grateful to Opposition Members for picking up on that point and for tabling amendment 57. However, as it does not include the whole of the cross-reference required, I would be grateful if the hon. Gentleman did not press it. Amendments 55 and 56 do insert the correct cross-references.
The hon. Member for Fareham spoke to amendments 58 and 60, which relate to Government amendments 135 to 137. Some groups have interests in companies that are not controlled by the group, but the group is nevertheless entitled to more than 75 per cent. of the profits of those companies. Such a company will not form part of the group for accounting purposes, so its results will not be included in the groups consolidated financial statements. At the moment, such a company would be treated as a member of the group for the purposes of calculating the UK measure of net finance expenses. Government amendment 137 ensures that such a company will be included in the UK measure of net finance expenses only if it is a member of the group for accounting purposes.
The draft clauses as published also contain a rule in paragraph 62(2) that was intended to deal with a particular consequence affecting the general partner of a partnership that owns UK companies. That rule is now redundant due to amendment 137 and could provide avoidance planning opportunities if not removed, so amendments 135 and 136 will remove the measures.
Amendments 58 and 60 are intended to deal with a concern about the finance expense amounts payable and financing income amounts receivable by a UK group company that relates to a period before or after that company is a member of the group. The concern is, for example, that where an amount of financing income relating to a loan made by a UK company before it joined a group continues to be received by the company when it is a member of the group, financing income would not be taken into account in applying the debt cap rules.
I do not agree that the current rules provide for that outcome. Although different statutory language might achieve the same result, I do not think that the amendments are successful. However, it might be helpful for me to put on record a reassurance that the rules in paragraphs 52(3) and 53(3) are intended to work so that only finance expense amounts and financing income amounts that accrue to a UK company while it is a member of the group under consideration are taken into account when calculating any disallowance of finance expenses and any exemption of financing income for the purposes of the debt cap. I hope that on the basis of that reassurance, the hon. Gentleman will feel able to withdraw his amendments. Amendment 59 was dealt with under schedule 14 and accepted this morning.
Finally, the hon. Gentleman expressed a concern at the beginning of his remarks that there was a danger of trading income swamping treasury income in group treasury companies. I do not think that there is a problem, because the amendments proposed ensure that activities traditionally undertaken by treasury companies can be excluded. That includes receiving deposits, making loans, managing cash management schemes and investing surplus funds. In that way, the danger about which he was concerned has been dealt with.
Balancing payments between group companies: no charge to, or relief from, tax
31A (1) This paragraph applies where
(a) one or more financing income amounts of a company (company A) for the relevant period of account are
(i) by virtue of paragraph 27, not brought into account, or
(ii) by virtue of paragraph 30, reduced,
(b) one or more financing expense amounts of another company (company B) for the relevant period of account are
(i) by virtue of paragraph 15, not brought into account, or
(ii) by virtue of paragraph 18, reduced,
(c) company A makes one or more payments (the balancing payments) to company B, and
(d) the sole or main reason for making the balancing payments is that the conditions in paragraphs (a) and (b) are met.
(2) To the extent that the sum of the balancing payments does not exceed the amount specified in sub-paragraph (3), those payments
(a) are not to be taken into account in computing profits or losses of either company A or company B for the purposes of corporation tax, and
(b) are not to be regarded as distributions for any of the purposes of the Corporation Tax Acts.
(3) The amount referred to in sub-paragraph (2) is the lower of
(a) the sum of the financing income amounts mentioned in sub-paragraph (1)(a), and
(b) the sum of the financing expense amounts mentioned in sub-paragraph (1)(b)..
The amendment aims simply to ensure that balancing payments made within a group are done in a tax-neutral way. The amendment allows businesses to act as they see fit with regard to compensatory payments and ensure that tax law does not intervene. I hope that the amendment will be widely accepted across the Committee.
Schemes involving manipulation of rules in Part 2
38A (1) A period of account of the worldwide group that, apart from this paragraph, is not within paragraph 2(1) is treated as within that provision if conditions A to C are met.
(2) Condition A is that
(a) at any time before the end of the period, a scheme is entered into, and
(b) if the scheme had not been entered into, the period would have been within paragraph 2(1).
(3) Condition B is that the main purpose, or one of the main purposes, of any party to the scheme on entering into the scheme is to secure that the period is not within paragraph 2(1).
(4) Condition C is that the scheme is not an excluded scheme.
Schemes involving manipulation of rules in Parts 3 and 4
38B (1) Where conditions A to C are met in relation to a period of account of the worldwide group (the relevant period of account), the tested expense amount, the tested income amount and the available amount for the period are to be calculated in accordance with paragraph 38D.
(2) Condition A is that
(a) at any time before the end of the relevant period of account, a scheme is entered into, and
(b) the main purpose, or one of the main purposes, of any party to the scheme on entering into it is to secure that the amount of the relevant net deduction (within the meaning given by paragraph 38C) is lower than it would be if that amount were calculated in accordance with paragraph 38D.
(3) Condition B is that a result of the scheme is that
(a) the sum of the profits of UK group companies that arise in relevant accounting periods and that are chargeable to corporation tax is less than it would be if that sum were determined in accordance with paragraph 38D, or
(b) the sum of the losses of UK group companies that arise in relevant accounting periods (other than any taken into account in calculating profits within paragraph (a)) and that are capable of being a carried-back amount or a carried-forward amount is higher than it would be if that sum were determined in accordance with paragraph 38D.
(4) Condition C is that the scheme is not an excluded scheme.
(5) In a case where
(a) a profit or loss arises in an accounting period of a UK group company, and
(b) a proportion of that period does not fall within the relevant period of account,
the profit or loss is to be reduced, for the purposes of condition B, by the same proportion.
Meaning of relevant net deduction
38C (1) In paragraph 38B(2) the relevant net deduction means
(a) the amount by which the total disallowed amount exceeds the tested income amount, or
(b) if the total disallowed amount does not exceed the tested income amount, nil.
(2) In this paragraph the total disallowed amount means
(a) the amount by which the tested expense amount exceeds the available amount, or
(b) if the tested expense amount does not exceed the available amount, nil.
Calculation of amounts
38D (1) References in paragraph 38B to the calculation of any amount or sum in accordance with this paragraph are to the calculation of that amount or sum on the following assumptions.
(2) The assumptions are that
(a) the scheme in question was not entered into, and
(b) instead, anything that it is more likely than not would have been done or not done had this Schedule not had effect in relation to the relevant period of account, was done or not done.
Meaning of carried-back amount and carried-forward amount
38E (1) In paragraph 38B carried-back amount means
(a) an amount carried back under section 393A(1)(b) of ICTA (trading losses),
(b) an amount carried back by virtue of a claim under section 459(1)(b) of CTA 2009 (non-trading deficits from loan relationships), or
(c) an amount carried back under section 389(2) of CTA 2009 (deficits of insurance companies).
(2) In paragraph 38B carried-forward amount means
(a) an amount carried forward under section 76(12) or (13) of ICTA (certain expenses of insurance companies),
(b) an amount carried forward under section 392A(2) or (3) of ICTA (UK property business losses),
(c) an amount carried forward under section 392B(1)(b) of ICTA (overseas property business losses),
(d) an amount carried forward under section 393(1) of ICTA (trading losses),
(e) an amount carried forward under section 396(1) of ICTA (losses from miscellaneous transactions),
(f) an amount carried forward under section 436A(4) of ICTA (insurance companies: losses from gross roll-up business),
(g) an amount carried forward under section 8(1)(b) of TCGA 1992 (allowable losses),
(h) an amount carried forward under section 391(2) of CTA 2009 (deficits of insurance companies),
(i) an amount carried forward under section 457(3) of CTA 2009 (non-trading deficits from loan relationships),
(j) an amount carried forward under section 753(3) of CTA 2009 (non-trading loss on intangible fixed assets),
(k) an amount carried forward under section 925(3) of CTA 2009 (patent income: relief for expenses), or
(l) an amount carried forward under section 1223 of CTA 2009 (expenses of management and other amounts).
Schemes involving manipulation of rules in Part 5
38F (1) This paragraph applies to a financing income amount of a company received during a period of account of the worldwide group if
(a) apart from this paragraph, the financing income amount would, by virtue of paragraph 32, not be brought into account for the purposes of corporation tax, and
(b) conditions A to C are met.
(2) Condition A is that, at any time before the financing income amount is received, a scheme is entered into that secures that any of the conditions in sub-paragraphs (2) to (4) of paragraph 32 (the relevant paragraph 32 condition) is met in relation to the amount.
(3) Condition B is that the purpose, or one of the main purposes, of any party to the scheme on entering into the scheme is to secure that the relevant paragraph 32 condition is met.
(4) Condition C is that the scheme is not an excluded scheme.
(5) Where this paragraph applies to a financing income amount, the relevant paragraph 32 condition is treated as not met in relation to the amount.
(6) Paragraph 38 (meaning of references to a financing income amount of a company) applies for the purposes of this paragraph.
Meaning of scheme and excluded scheme
38G (1) For the purposes of this Part scheme includes any scheme, arrangements or understanding of any kind whatever, whether or not legally enforceable, involving a single transaction or two or more transactions.
(2) For the purposes of this Part a scheme is excluded if it is of a description specified in regulations made by the Commissioners.
(3) Regulations under sub-paragraph (2) may make different provision for different purposes..
Amendment 117, in schedule 15, page 167, line 11, leave out is and insert
, and all other amounts that are relevant amounts in respect of the group treasury company and the relevant period, are.
Amendment 118, in schedule 15, page 167, line 13, leave out this purpose and insert
the purposes of this paragraph in respect of the relevant period.
Amendment 119, in schedule 15, page 167, line 15, at end insert
(3A) If two or more members of the worldwide group are group treasury companies in the relevant period, an election under this paragraph made by any of them is not valid unless each of them makes such an election in respect of the relevant period before the end of the 3 year period mentioned in sub-paragraph (3)..
Amendment 120, in schedule 15, page 167, line 25, leave out not UK companies and insert
neither UK group companies nor relevant group companies.
Amendment 121, in schedule 15, page 167, line 28, leave out that are UK companies and insert
each of which is either a UK group company or a relevant group company.
Amendment 122, in schedule 15, page 167, line 38, leave out and and insert
(ca) subscribing for or holding shares in another company which is a UK group company and a group treasury company,
(cb) investing in debt securities, and.
Amendment 123, in schedule 15, page 168, line 6, at end insert
debt security has the same meaning as in the FSA Handbook..
Amendment 124, in schedule 15, page 168, line 13, at end insert
Real estate investment trusts
42A (1) This paragraph applies where, apart from this paragraph, an amount (the relevant amount) is
(a) a financing expense amount of a company by virtue of meeting condition A in paragraph 39, or
(b) a financing income amount of a company by virtue of meeting condition A in paragraph 40.
(2) The relevant amount is treated as not being a financing expense amount or a financing income amount of the company if the finance arrangement is one to which section 211 of CTA 2009 does not apply by virtue of section 120(3)(a) of FA 2006..(Mr. Timms.)
Amendment 52, in schedule 15, page 168, line 18, after A, insert or condition B.
Amendment 53, in schedule 15, page 168, line 20, after A, insert or condition B.(Mr. Hoban.)
Amendment 125, in schedule 15, page 170, line 3, at end insert
(7) The Commissioners may by regulations make provision (including provision conferring a discretion on the Commissioners) about circumstances in which regulations under sub-paragraph (4) are not to apply in relation to the finance arrangements.. (Mr. Timms.)
Amendment 54, in schedule 15, page 170, line 19, leave out from the finance arrangement..
Amendment 55, in schedule 15, page 171, line 10, leave out an investment company and insert a company with investment business.
Amendment 56, in schedule 15, page 171, line 11, leave out 4 of ICTA and insert 16 of CTA 2009.(Mr. Hoban.)
Amendment 128, in schedule 15, page 171, line 17, leave out 75 of ICTA (expenses of management: companies with investment business) and insert
1219 of CTA 2009 (expenses of management of a companys investment business).
Amendment 129, in schedule 15, page 171, line 42, at end insert
50A (1) This paragraph applies where, apart from this paragraph, an amount (the relevant amount) is a financing expense amount of a company by virtue of meeting condition A, B or C in paragraph 39.
(2) The relevant amount is treated as not being a financing expense amount of the company if the creditor is a charity.
(3) In this paragraph
charity means any body of persons or trust established for charitable purposes only;
(c) in a case where the relevant amount is a debit that meets condition A in paragraph 39, the loan creditor who receives the payment in relation to which the relevant amount arises;
(d) in a case where the relevant amount meets condition B or C in paragraph 39, the recipient of the payment in relation to which the relevant amount arises.
Educational and public bodies
50B (1) This paragraph applies where, apart from this paragraph, an amount (the relevant amount) is a financing expense amount of a company by virtue of meeting condition A, B or C in paragraph 39.
(2) The relevant amount is treated as not being a financing expense amount of the company if the creditor is
(a) a designated educational establishment,
(b) a health service body,
(c) a local authority, or
(d) a person that is prescribed, or is of a description of persons prescribed, in an order made by the Commissioners for the purposes of this paragraph.
(3) The Commissioners may not prescribe a person, or a description of persons, for the purposes of this paragraph unless they are satisfied that the person, or each of the persons within the description, has functions some or all of which are of a public nature.
(4) In this paragraph
(e) in a case where the relevant amount is a debit that meets condition A in paragraph 39, the loan creditor who receives the payment in relation to which the relevant amount arises;
(f) in a case where the relevant amount meets condition B or C in paragraph 39, the recipient of the payment in relation to which the relevant amount arises;
designated educational establishment has the same meaning as in section 105 of CTA 2009;
health service body has the same meaning as in section 519A of ICTA..(Mr. Timms.)
Amendment 59, in schedule 15, page 172, line 33, leave out Part and insert Schedule.(Mr. Hoban.)
Amendment 130, in schedule 15, page 173, line 24, leave out income statement and insert financial statements.
Amendment 131, in schedule 15, page 173, line 36, leave out redeemable.
Amendment 132, in schedule 15, page 174, line 2, leave out income statement and insert financial statements.
Amendment 133, in schedule 15, page 174, line 14, leave out income statement and insert financial statements.
Amendment 134, in schedule 15, page 174, line 33, leave out income statement and insert financial statements.
Amendment 135, in schedule 15, page 175, line 30, leave out sub-paragraph (2).
Amendment 136, in schedule 15, page 175, leave out lines 36 to 39.
Amendment 137, in schedule 15, page 178, line 13, after if insert
the company is a member of the worldwide group and.
Amendment 138, in schedule 15, page 178, line 20, leave out sub-paragraph (7).
Amendment 139, in schedule 15, page 178, line 28, leave out sub-paragraph (9).
Amendment 140, in schedule 15, page 178, line 35, leave out or an income statement of the worldwide group.
Amendment 141, in schedule 15, page 178, line 37, leave out sub-paragraph (3).
Amendment 142, in schedule 15, page 179, line 3, leave out from not to and in line 4 and insert acceptable.
Amendment 143, in schedule 15, page 179, line 10, leave out sub-paragraph (3) and insert
(3) For the purposes of this paragraph financial statements are acceptable if
(a) they are drawn up in accordance with international accounting standards,
(b) they meet such conditions relating to accounting standards, or accounting principles or practice, as may be specified in regulations made by the Commissioners, or
(c) conditions A to C are met..
Amendment 144, in schedule 15, page 179, line 18, leave out of the worldwide group for the period.
Amendment 145, in schedule 15, page 179, line 20, after second the insert same.
Amendment 146, in schedule 15, page 179, line 25, leave out from the to , and in line 26 and insert financial statements.
Amendment 147, in schedule 15, page 179, line 28, leave out from in to drawn in line 29 and insert
IAS financial statements of the worldwide group for the same period, were such statements.
Amendment 148, in schedule 15, page 179, line 32, leave out from first the to are and insert financial statements.
Amendment 149, in schedule 15, page 180, line 17, at end insert
(1A) References in this Schedule to amounts disclosed in financial statements do not include, in the case of an amount that
(a) is an amount mentioned in paragraph 55(1)(a) to (g), and
(b) has been capitalised and is accordingly included in the balance sheet comprised in the financial statements,
any part of that amount that was included in a balance sheet comprised in financial statements for an earlier period..
Amendment 150, in schedule 15, page 181, line 4, at end insert
FSA Handbook means the Handbook made by the Financial Services Authority under FISMA 2000;.
Amendment 151, in schedule 15, page 181, line 12, at end insert
In paragraph 5 of Schedule 28AA to ICTA (provision not at arms length), after sub-paragraph (8) (as inserted by paragraph 14 of Schedule 14 to this Act) insert
(9) For the purposes of sub-paragraph (1), Schedule 15 to FA 2009 (tax treatment of financing costs and income) is to be disregarded..
Amendment 152, in schedule 15, page 181, line 15, after group insert
Amendment 153, in schedule 15, page 181, line 15, at end insert , or
(b) to which paragraph 79 applies.
Anti-avoidance: change of period of account of worldwide group
79 This paragraph applies to a period of account of the worldwide group (the relevant period of account) if
(a) the ultimate parent of the group changes the date to which financial statements of the group are drawn up,
(b) as a result of the change, the relevant period of account
(i) begins before 1 January 2010, and
(ii) includes a period that would, if the change had not been made, have fallen within a period of account beginning on or after that date, and
(c) the main purpose, or one of the main purposes, of the ultimate parent of the group in making the change is to secure that the first period of account in relation to which this Schedule has effect does not include any period falling within the relevant period of account..
Amendment 154, in schedule 15, page 181, line 15, at end insert
(1) An amount that would, apart from this paragraph, meet condition A, B or C in paragraph 39 (definition of financing expense amount) does not meet that condition if it is a debit that, but for a relevant enactment, would be brought into account for the purposes of corporation tax in an accounting period beginning before 1 January 2010.
(2) For this purpose the following are relevant enactments
(a) section 373 of CTA 2009 (late interest treated as not accruing until paid in some cases),
(b) section 407 of that Act (postponement until redemption of debits for connected companies deeply discounted securities),
(c) section 409 of that Act (postponement until redemption of debits for close companies deeply discounted securities), and
(d) regulation 3A of the Loan Relationships and Derivative Contracts (Change of Accounting Practice) Regulations 2004 (S.I. 2004/3271) (prescribed debits and credits brought into account over prescribed period).
(3) An amount that would, apart from this paragraph, meet condition A, B or C in paragraph 40 (definition of financing income amount) does not meet that condition if it is a credit that, but for the regulation mentioned in sub-paragraph (2)(d) of this paragraph, would be brought into account for the purposes of corporation tax in an accounting period beginning before 1 January 2010..(Mr. Timms.)
On a point of order, Mr. Hood. I am concerned that I may have become somewhat confused in the measures that we have just taken. My advice to the Committee would not be to accept amendments 57, 58 and 60, as I said earlier.
Not wishing anyone to think that I had exhausted schedule 15I have been overwhelmed by the Ministers generosity in accepting some of the amendments that I tabledI want to explore one or two points that I think are important. The Minister probably addressed one of them when we debated the last but one group of amendments.
One issue about the construction of the measure is the use of the available amount that is defined in part 8 and the tested expense amount or tested income amount that is defined in part 7. Calculations of the former are based on financial statements, whereas calculations of the latter are based on tax computations. That would not be a problem if there were a perfect alignment between UK generally accepted accounting practice and international financial reporting standards and the basis on which tax computations are prepared. Life would be fantastic if it were that simple, but it is not, and there are gaps. That creates a tension when those differences are important in the calculation of either the tested amount or the available amount.
One issue that the Minister referred to when we debated the penultimate group of amendments was deadlocked joint venture companies. One party may have 75 per cent. of the ordinary share capital but 51 per cent. of the income, but because of the arrangements between the two owners, there is deadlock, so it does not count towards control when it comes to the consolidated results of either partner in the venture.
The tested expense amount is defined as
the sum of net financing deduction of each relevant group company in paragraph 52(1), but according to paragraph 68(6), a relevant group company would be a 75% subsidiary. The situation is that the tested amount would include the expenses of a relevant group company, but the available amount would not take that into account because of the deadlock arrangements between two shareholders in a joint venture such as the one I described. I should be grateful if the Minister could tell us whether that anomaly was resolved by the last but one group of amendments or whether further work needs to be done to get the two calculations into line.
Another issue arises on the same point in connection with financial instruments by virtue of paragraph 39(2). Where a company has borrowed in dollars and then swapped the loan into sterling, if the contract rate accounts for the arrangement of the UK GAAP there would be a synthetic sterling interest which would be a finance expense account. However, where the accounts and the arrangements are under FRS 26 or IFRS, the US dollar interest would be included with the swap being ignored. Is this the result that is intended here?
Under paragraph 39(3), where a company accounts for a loan on a fair value basis, fair value movements are included within the finance expense account and therefore the tested amount. However, the equivalent amounts are not included in the available amounts. So a gapthat is perhaps the wrong word to use in this contextis opening up. Another issue may arise on partnerships because of the way they are dealt with and the question whether they are transparent for tax purposes. It is difficult to assess how significant these issues are, but I should be grateful if the Minister could share his thoughts with the Committee on how the differences between accounting and tax treatment work.
I think that some of the amendments that we have been debating will address some of the hon. Gentlemans concerns. Amendment 137, which ensures that a UK company must be a member of the group for accounting purposes, would deal with the problem of deadlocked joint ventures. On his concern about available versus total calculations, several potential mismatches created by the different treatment of more complex financial arrangements have been raised with us. The draft clauses published in December included a wider definition of finance expenses and finance income which would have prevented some of those mismatches, but there was a strong view from businesses that we should remove the impact of foreign currency adjustments and payments and receipts from derivative contracts from the debt rules.
I accept that narrowing the definitions might raise some problems, but I am cautious about introducing a quick solution to reintroduce other complexities that we wanted to eliminate. We will continue to look at these, consulting with interested parties. If we can find suitable solutions, we can announce additional rules at the time of the PBR which could take effect from 1 January 2010, although the legislation would follow shortly afterwards.