These amendments are to paragraphs 25 and 28 and both use the same wording. Those paragraphs contain powers enabling regulations to be made where there is a mismatch between the amount disclosed in the accounts of the worldwide group, which is known as the accounts amount, and that shown as the tax amount by a UK company. While drafting the regulations, it was discovered that the current powers did not allow us to lay regulations to correct a mismatch when an amount has been eliminated from the accounts of a worldwide group and so has not been disclosed. That might be significant, because if the interest arises on a loan between the members of the worldwide group, the interest will not be included in the consolidated accounts of the worldwide group, but it will appear as part of the tax amount of the UK company. Before an amount of interest is included in a debt cap calculation, other tax rules will have applied to it. As a result, there can be a disproportionate effect on the debt cap and the UK company may be at a disadvantage.
This is a somewhat complicated matter, so it might help the Committee if I give a simple example—I say “simple”, but the Committee will be the judge of that. Let us take a group of two companies named A and B that both prepare accounts to 31 December 2011. Company A pays bank interest of £10 million, while company B pays bank interest of £2 million, but also has a loan from company A and pays that company £6 million. The consolidated accounts for the group would ignore the loan between company A and company B and would therefore show only the £12 million interest paid by both companies to the banks. That £12 million would be the accounts amount under paragraphs 25 and 28 of the schedule. The £6 million paid by company B to company A is not disclosed in the accounts of the worldwide group and so cannot be part of the accounts amount. The tax amount for company B would the £2 million interest that is paid to the bank and the £6 million paid to company A, which makes £8 million in total. Because the £6 million paid by company B to company A is not disclosed in the accounts of the worldwide group, it is not possible to make an adjustment under paragraphs 25 or 28 to mitigate the impact on company B’s debt cap computation of other tax rules that apply to the interest.
One of those tax rules is the late interest rule, which states that in certain circumstances a company paying interest to a connected person can have a tax deduction for the interest only when it is paid and not, as is usually the case, as it accrues. For example, therefore, of the £6 million interest paid by company B to company A, £4 million of it accrued from 2003 to 2006, but was not paid until 2011. Including several years’ interest in the debt cap computation of company B might have an adverse effect on the computation of the debt cap disallowance. As I said, that intra-group interest is not disclosed in the accounts of the worldwide group, so we cannot make an adjustment to the debt cap computation to deal with it at the moment.
Amendments 8 and 9 extend the definition of “accounts amount” so that if no amount is disclosed in the accounts of the worldwide group in respect of a matter, the accounts amount is nil. Conversely, the definition of the “tax amount” of the UK company is also amended so that if no member of the worldwide group is entitled to a deduction under UK corporation tax, the tax amount will be nil. The amendments also allow for the possibility that more than one UK company will be entitled to a deduction and, if so, the tax amount in respect of the matter is the total of such deductions. The amendments enable one immediate issue to be addressed, and allow for similar issues to be resolved as they arise.
As I said, the issue is complicated, and I do not know whether hon. Members found that simple example to be simple—they would be forgiven if they did not. I hope, however, that it proves to have been a helpful explanation. The area is very technical, and I hope that the Committee is to some extent enlightened as to the need for the amendments, which support the position of representative bodies. It did not become clear that the amendments were needed until relatively recently, which was why their content was not included in the original draft of Bill. The amendments will help to ensure that the changes to the debt cap rules work correctly, which I think both sides of the Committee agree is vital.
I am sure that you will be glad to know, Mr Chope, that I am not really in dispute with the Government amendments. If there was an issue preventing a nil amount in respect of amounts not disclosed in the accounts of a worldwide group being taken within that mismatched context, that could be a problem. I found that the Minister’s simple example blew away the clouds of complexity straight away.
I am sure that the Minister will not be surprised by my question, which relates in part to the amendments. Paragraph 25 of schedule 5 cites a series of regulation-making powers that the commissioners have. I am not au fait with the mechanism for making such regulations. I presume that there is some delegation to the commissioners to make regulations. Alternatively, is there a statutory instrument, passed through either the negative or affirmative procedure? Will the Minister indicate the point at which those regulations might surface in the public domain and tell us whether Parliament will have any say over them? Otherwise, I am content with the amendments.
I am grateful for the hon. Gentleman’s comments. He will know that the overall debt cap arrangements were established in previous Finance Bills. As far as regulations are concerned, any statutory instrument will be subject to the negative procedure. At the moment, regulations are being drafted for only paragraph 28 of the schedule to allow changes to the available amount of the worldwide group if there is a mismatch between the accounts amount and the tax amount. The regulations will be released for a short consultation period before they are finalised and I hope that we will be able to say more about that shortly.
Thank you, Mr Chope. It is a pleasure to speak under your chairmanship. I will reserve my main comments on the provision for when we get to the amendments that we have tabled to schedule 6. However, will the Minister briefly explain the reasons for introducing the clause, which we have already welcomed?
I welcome the hon. Lady to her position on the Opposition Front Bench. I am grateful for her remarks about the clause, which concerns consortium claims for group relief. It widens the circumstances in which a loss arising in a UK consortium can be set against the profits of a company that is subject to UK tax. It also separately counters avoidance by tightening rules that allocate losses to a member in proportion to its interests.
It may be helpful to say a word or two about the background. The purpose of the consortium claims regime is to support enterprise when joint trading projects are undertaken, which may be too large, too risky or too complicated to be undertaken by one company on its own. This is achieved by enabling losses and other reliefs to be claimed or surrendered, in proportion to ownership, between a corporate member of a consortium and a consortium company. A consortium claim represents one of the two types of claim covered by the UK group relief system, the other being a group claim when a parent company owns at least 75% of a subsidiary’s share capital.
The rules governing the two types of claim differ in various ways, particularly in respect of the ownership requirements. A consortium claim is possible when a consortium member holds as little as 5% of a consortium company’s ordinary share capital. If a consortium member is part of a corporate group, another member of that group may claim the losses to which the consortium member is entitled. That is commonly known as the “link company rule”. Under current rules, the link company must be UK-resident. Those provisions extend the rules to permit a claim where a link company is established in the European economic area. In such circumstances, a UK tax loss may then be set against a profit subject to UK tax.
Separately, a consortium relief avoidance scheme has recently been identified. It enables companies to manipulate the rules and obtain relief for a proportion of the consortium’s losses that exceeds their actual involvement in it. The provisions in clause 12 amend the rules. They allocate a consortium’s losses among its members by ensuring, in addition to existing requirements, that loss relief is proportionate to a member’s voting power, and that voting power is an effective means of controlling the consortium company. To address the avoidance scheme as quickly as possible, we announced that we would legislate from the date of publication of the draft clause on 12 July 2010.
The measure reflects the Government’s commitment to preventing tax avoidance while ensuring that the tax regime shows that the UK is open to business. I hope that the Committee will agree to allow the clause to stand part of the Bill.