I have just a couple of comments on schedule 20, which the clause introduces. First, a word of praise, which does not come very readily from my lips on these occasions, but there has been some very positive comment on the consultation for clause 41 and schedule 20. That consultation has worked well and improved the schedule. However, one or two issues have been raised with me.
Companies have used the late interest rules to get a tax reduction for interest expenses when they have needed it. That has particularly been the case with part equity-backed businesses. If an interest reduction cannot be used in the current year, it will be carried forward as a non-trade debit that can be offset against non-trade credits. That was not felt to be particularly useful, so companies would therefore trigger the debit when they could use it or needed it. The schedule takes the flexibility away on timing for finance costs.
The Governments counter-argument might be that, as the legislation has been partly introduced for anti-avoidance purposes, that might well be the purpose of removing that flexibility. However, companies could still obtain tax relief when the interest is paid using companies non-qualifying territoriesfor example, Jersey. That means that they cannot refer an accruals basis for tax relief when they need to. Will the Minister comment on the interaction between the schedule and the debt cap rules? Some clarity is required and I would be grateful for his thoughts on how that clarity might be introduced.
First, I acknowledge the comments made by the hon. Gentleman on how the consultation was handled. I am sure that that statement will be welcomed by my officials who have undertaken the consultation exercise. He is right to point out that there is widespread recognition for what the Government are doing; there were only some minor points raised regarding the issue of loan relationships involving connected parties.
He pointed to the issue of private equity companies. As he is aware, the legislation contains an election to enable a company to stay on a pay basis for a year after the change. That should give companies time to rearrange loans if they think they need to. The private equity industry has raised some practical difficulties with HMRC, where interest is payable to a company controlled by a number of private equity investors. Those are matters that we believe are best dealt with in guidance and HMRC is discussing them with the private equity industry.
In the current economic circumstances, was any consideration given by the Treasury to extending the period of 12 months? The Minister will be aware that, particularly given the potential difficulty of acquiring funding, it may well be that that period, which might normally seem quite a sensible transition period, will not prove long enough for the reorganisation of finances for private equity companies in this difficult economic situation.
Well, we always consider these matters carefully. It is our judgment that a period of 12 months is a reasonable period of time to allow companies to rearrange loans if they need to do so.
The point was made about whether or not an election should be allowed for private equity groups to deduct interest on a paid basis, if they want to. In response, I would say that allowing companies the choice to deduct interest, either when it accrues or when it is paid, would go against one of the key principles of the corporation tax rules on the taxation of interest. Interest is taxable and relievable as it accrues in the accounts. We are not persuaded that an exception needs to be made for private equity. However, HMRC will work with the industry in improving its guidance in this area.
The point about the interaction with the debt cap was made by the hon. Member for Fareham. Specifically on that point, I can say to him in response that ordinary loan relationship rules, such as late interest, are applied before the debt cap applies. That is another matter that we will cover in the guidance.
As I have said before, HMRC is in discussions with the private equity industry about these matters and we believe that they can be satisfactorily addressed through guidance. The industry is happy with that.