The hon. Gentleman is right to say that the measure is highly technical, and it may help if I try to take the Committee through it. Clause 9 and schedule 3 address an anomaly that has arisen concerning the  scope of distribution exemption. As the law stands, there is a risk of some very large, unexpected and unintended tax liabilities arising within groups of companies. This legislation will ensure that those potentially damaging tax liabilities do not arise either in future or in past periods.

To provide some background information, UK distributions have always been exempt from corporation tax. In 2009, a new regime was introduced that extended the exemption to foreign distributions. In common with its predecessor, the new distribution exemption regime applies only to distributions of an income nature and not to those of a capital nature. Instead, those of a capital nature fall within the legislation that taxes the capital gains of companies.

Following the introduction of the 2009 rules, HMRC and tax specialists in the legal and accountancy professions looked closely at the question of which distributions qualify for exemption and which do not. HMRC took legal advice and concluded that, in certain circumstances that are relatively common within groups of companies, amounts that had historically been considered as income distributions that qualified for exemption may, in fact, constitute repayments of capital. Those amounts cannot qualify for the distribution exemption.

Although those points came to light only after the introduction of the 2009 distribution exemption legislation, they were equally relevant to the UK distribution exemption before 2009. Therefore, HMRC concluded that unexpected tax liabilities have potentially arisen in respect of transactions undertaken both before and after the introduction of the new exemption rules in 2009. That view gave rise to considerable concern, because it affected the tax treatment of certain types of transaction that are quite commonly carried out in corporate reorganisations.

Clause 9 and schedule 3 simplify and expand the distribution exemption regime in two ways. First, the exemption regime for UK and foreign distributions is extended by removing the exclusion for distributions that are of a capital nature. Secondly, the legislation ensures that certain amounts that may be repayments of capital are instead brought into the scope of the term “distribution” for corporation tax purposes. That is in line with long-standing expectations about the status of those transactions and it enables the amounts to qualify for the exemption.

It has always been the case that in certain situations distributions from the company can be taken into account in calculating corporation tax liability on chargeable gains, and that will remain the case. However, the changes being made now will clarify which distributions are charged corporation tax on chargeable gains and which distributions are exempt from corporation tax, subject only to certain narrowly defined anti-avoidance rules.

Following the announcement of this measure at the June Budget, a significant number of detailed and very helpful comments have been made about the draft legislation. I want to thank all those who took the time to make those comments, as they have led to a number of significant improvements. One addition to the draft legislation is a small but significant extension to the scope of one part of the distribution exemption rules to accommodate distributions that are now brought within its scope. The exemption that is currently given for all  dividends that are not associated with tax avoidance is now extended to any distribution, subject to the same tax avoidance condition.

Another change that was made following consultation was to restrict the scope of those changes to corporation tax only. The problems that I have described arose only in respect of corporation tax. There were some concerns that the changes might adversely affect some income tax payers, which had not been intended. Income tax payers will continue to pay income tax on all distributions received with very few exceptions, such as distributions received during the winding-up of a company and repayments of share capital.

Although the provision fully addresses the anomaly concerning the scope of the distribution exemption, some of the detailed comments received after its publication have raised other important questions about wider distributions legislation. I can inform the Committee that HMRC officials have proposed a joint working group with representatives of the tax profession. The group will aim to improve common understanding of the legislation with a view to improving guidance. That will build upon the constructive dialogue that has helped so much with the development of the Bill.

The hon. Gentleman raised a number of questions about how the clause will work. First, there is the question of yield and whether the changes will reduce the corporation tax take. The changes will not reduce the take because they merely restore expectations for UK companies. It has not been HMRC’s practice to charge tax on the distributions to which the changes apply. The clause will, if one likes, restore the status quo.

The hon. Gentleman also asked why the measure was retrospective. Its retrospective nature allows companies to take advantage of the benefits of the new rules at any time. The legislation is almost always beneficial, but the opt-out entitlement allows a company to elect for any distribution made before 22 June 2010 to be unaffected by the changes. The retrospective effect will not apply unless a company so chooses—the election is made through the tax return—and that merely preserves existing expectations. Large and unexpected liabilities would arise without those reforms, and that would create uncertainty within the tax system, which we do not want. If I may anticipate the hon. Gentleman’s next question, we do not have an estimate of the potential liabilities in aggregate but, none the less, there is a concern that there might be an unexpected tax liability. The clause seeks to prevent that from happening.

The provision will end the potentially damaging uncertainty that would have arisen due to the risk of very large and wholly unexpected tax liabilities. The changes make it clear that the potential liabilities will not arise in future, and they also remove them retrospectively.