Schedule 2

Finance (No. 2) Bill – in a Public Bill Committee at 5:00 pm on 19th October 2010.

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Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 5:00 pm, 19th October 2010

I beg to move amendment 4, in schedule 2, page 30, line 15, leave out ‘enter into contracts’ and insert ‘do business’.

Amendment 4 relates to paragraph 1(5) of schedule 2 and appears to the untrained eye to be a pedantic technical amendment to change the terminology of a small element of the Bill—in many ways, that might be a reasonable interpretation. It is a probing amendment that follows on from points raised by the Institute of Chartered Accountants in England and Wales, which, in its submission, pointed out that there could be an anomaly in the use of the term that defines the commercial activities related to that sub-paragraph, particularly the use of the phrase “enter into contracts” rather than “do business”.

I am told that drafts of this sub-paragraph have raised a few eyebrows among those legal eagles who understand such questions. In particular, difficulties could arise when there are groups with a holding company because the draft legislation required that the issuing company—the holding company—would require a permanent establishment, and not the subsidiary company that had the trading operation in which the venture capital trust or the enterprise investment scheme funds would be employed. In many groups, the holding company is just that and does not carry on any activity other than the holding of shares in its subsidiaries—this is similar  to the point that we were trying to make earlier. That is unlikely, therefore, to constitute, in a common law sense, conducting a business.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

It is a pleasure to serve under your chairmanship, Mr Caton.

Given that the permanent establishment has to comply with the OECD model treaty, will the hon. Gentleman tell us whether the wording departs from that of the model treaty?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am not familiar with that treaty and I do not have it to hand, but I am told by the Institute of Chartered Accountants that there is a risk if we look simply at the arrangements of parent companies, which can often be relatively dormant operations that contain other firms that are active. I am making a specific point about whether we should use the phrase “enter into contracts” or “do business” in the Bill, because if the matter is challenged in court and the interpretation goes the wrong way, that could unpick many aspects of legislation.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

I, too, am privileged to serve under your illustrious chairmanship, Mr Caton.

Surely this point is well understood and settled in law with regard to OECD guidance on the model tax treaty. The concept of a holding company that holds shares but does not operate is also well understood, and has been by tax planners for decades.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I understand that point and the hon. Gentleman might understand it as well. We are, I hope, both individuals who take a common-sense view of such things. Unfortunately, that is often not what the courts do when looking at the technical definitions that we enshrine within our statute. The Institute of Chartered Accountants has highlighted a perceived risk, which is not necessarily born from my own line-by-line scrutiny of the Bill. It suggests that if we append the notion of entering into contracts to the activity of a group company that is essentially a shell parent arrangement, that might well be an imprecise definition of what that parent company actually undertakes. Such an approach might not capture the true spirit of the Bill, which is something on which he and I agree. Consequently, requiring the company to have a permanent establishment through which the business is carried out—indeed, maintaining the existing definition of to “enter into contracts”—could be seen to run counter to commercial realities. If existing practice in law is based on the term “do business”, and if that has worked successfully since the Finance Act 2003, it might be more prudent to retain that wording.

As I said, the point is specific, but I wanted to draw out the Minister’s definition, not least because courts will look at what Ministers say for guidance should any cases crop up in the future.

Photo of David Gauke David Gauke The Exchequer Secretary

The hon. Gentleman, I think with a degree of hesitation and embarrassment, said that he was asking about a small, pedantic point, but if he cannot do so in a Public Bill Committee considering a Finance Bill, when can he? There is no reason why he should be in any way apologetic for raising such a useful point.

The amendment tabled by the hon. Gentleman and his colleagues would replace the phrase “enter into contracts” with the words “do business” in reference to the agent acting for the permanent establishment. While the amendment would follow the normal UK definition of “permanent establishment” more closely, the definition is not meant to be the same as the normal UK one.

To put it bluntly, the normal UK definition is about allocating taxing rights, so a wide definition makes some sense. However, the version being used for the VC schemes is about determining what companies may benefit from financing that is subsidised by the UK taxpayer. Consequently, because the existing rule, which requires most of the trade to take place in the UK, is being removed, it is right that we put in its place something whereby the company raising the funds must have a substantial UK presence to ensure value for money for the UK taxpayer. Of course, in doing so, we must ensure that we comply with EU state aid rules, but that is the balance that we are trying to strike.

This is not a fundamental matter of principle. The draft legislation, which is substantially as proposed by the previous Government, aims to secure the future of the schemes by making them compliant with state aid rules, while retaining some benefit for the UK. We think that the balance as set out in the schedule is correct. Consequently, I urge the hon. Member for Nottingham East to withdraw his amendment. He makes a fair point, but I hope that my explanation helps him. If we were to move in the direction set out in his amendment, we could make it rather too easy for businesses with only a slight UK connection to benefit from the reliefs, which I do not think is the intention of any member of the Committee.

As I said, the draft was put out for consultation and changes have been made in response. We have got the right wording here, so I urge the hon. Gentleman to withdraw his probing amendment. I hope that I have provided sufficient clarification of the thinking behind the wording used in this context.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

Who am I to question the wisdom—sometimes—of the massed ranks of officials who support and maintain the beautifully crafted words of the Minister? Occasionally I will take up the right to question, but on this occasion I am more than happy to accept that their legal advice is superior to my judgment on this particular matter. Nevertheless, if there are, on reflection, any issues and the Treasury wishes to table any amendments on Report, we will certainly be happy to support them, as long as we maintain the spirit of the legislation by creating as watertight a series of reforms as possible. That, ultimately, is our joint goal and, consequently, I am more than happy to beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 2 agreed to.