With this it will be convenient to discuss the following:
Amendment 25, page 56, line 28, leave out from ‘related’ to end of line 30.
Amendment 26, page 56, line 32, leave out from ‘company’ to ‘is’ in line 34.
Amendment 22, page 56, line 38, leave out ‘without the involvement of a relevant company’.
Amendment 23, page 56, line 39, leave out from beginning to end of line 16 on page 57.
As I said, we broadly welcome the changes to the consortium conditions in the Corporation Tax Act 2010 through the relaxation of the definition of a link company so that it includes companies established in the EEA. As the Minister has explained, that currently applies only to linked companies that are established in the UK, so I have tabled a number of probing amendments with regard to the detail.
I am particularly querying why the Government decided to limit the extension to companies established in the EEA, rather than to worldwide link companies. Is there a specific policy reason why the restriction applies to companies established in the EEA? Is it because there would be an unacceptable cost if it were extended on a worldwide basis? Is restricting it to companies established in the EEA consistent with EU law? It has been suggested to us that the issue might give rise to legal challenges.
On the policy side, it has been said that the proposed amendment to the consortium claim rules is inconsistent with the rules relating to group relief that permit the tracing of groups throughout worldwide companies. Under the changes introduced in the Finance Act 2000, following the ICI v Colmer decision, the Government took the approach of allowing group relief eligibility to be traced through non-resident companies, whether based in the EEA or outside it. That was seen generally by the corporate world as a helpful development. Against that background, it is surprising that, in the much less common situation of consortium claims made via link companies, a more narrow approach has been adopted. Will the Minister explain why the Government have decided to go down that path?
We suggest that the limited relaxation of the rules to EEA companies only complicates the group relief rules overall and possibly provides a trap for the unwary. If there is no or a minimal cost to doing so, I should be grateful if the Minister explained what the predicted costs are likely to be and said whether there was a financial reason for imposing the limitation. If no cost is involved, we recommend that the relaxation should be extended to worldwide link companies.
More importantly, we believe that the provision could be in breach of EU law. I accept that it is always difficult to follow oral examples of companies when discussing complex arrangements, but let us take a situation in which a UK company owns 100% of a US company, which owns 100% of an EU company, which owns 50% of a UK trading company and assume that the other conditions for a consortium claim, with the UK company being the claimant and the UK trading company being the surrenderer, are satisfied. As it stands under section 133(6), a consortium claim would be denied. It has been suggested that that is clearly discriminatory against the EU company because it treats an investment by the EU company in the consortium less favourably than if the EU company had been resident in the UK. As such, that is a clear breach of the freedom of establishment of that EU company.
Will the Minister say whether legal advice has been taken on that point and whether he is satisfied that the issue could not be subject to legal challenge? Will he also answer my earlier question about whether there is a public policy reason or financial reason for establishing the limitation?
I am grateful for the opportunity to speak to this group of amendments and I appreciate the probing nature in which they were tabled and introduced by the hon. Lady. The issue being raised is about whether the proposed changes in the Bill might not go far enough to ensure EU compliance. That view is not shared by the Government. Broadly, our position is clear: direct tax policy is a matter in respect of which individual EU member states have sovereignty over their own regimes, but we accept that that sovereignty must be exercised in a manner consistent with EU law, including the fundamental freedoms. The Government are clear that the legislation should be sufficient to comply with EU law, but go no further.
The amendments seek to go further than what we believe is necessary to comply with EU law. They seek to extend the scope for consortium relief claims to be made. First, the changes would allow claims whenever a link company was resident, which goes beyond the requirement that a link company must be UK-related or established in the EEA.
Secondly, they would remove the requirement, under the intended extension for EEA link companies, that a link company and a UK claim or surrender company that is a member of the link company’s group must be connected through a group relationship that does not extend outside the EEA. The hon. Lady gave a helpful example, which I know the Committee always appreciates. The combination of those two changes would significantly extend the range of situations in which claims would be permitted.
The Government considered those issues when they were raised during the consultation, and we do not accept that such changes are required to ensure compliance with EU law. EU law does not extend the freedom of establishment to companies outside the EEA, and the amendments would do that, in going further than EU law requires by gold-plating compliance at the Exchequer’s expense.
Certainly. By “gold-plating”, I mean that were we to agree to the amendments—I accept they are of a probing nature—we would be going further than the minimum requirement for meeting our EU obligations, by extending the measure to include link companies outside the EEA. That would have a cost, which the hon. Lady specifically asked about. There is a potential cost of £5 million in tax arising from the discontinuing of litigation from earlier periods in three known cases, and there is potential for additional claims to be made. There are also likely to be consequences for HMRC’s position on wider group-relief EU litigation, with additional cost implications. So there would be a cost.
The hon. Lady raised the issue of UK group relief, and highlighted a case from 2000. The UK group relief rules were amended in 2006 to reflect the decision in the European Court of Justice on the Marks and Spencer case, which concerned group claims to group relief. The Government do not accept that that decision means that the consortium relief rules are non-compliant with EU law.
The rules relating to group and consortium claims are different, not least in that companies within a group are under common control, whereas a holding of only 5% can be sufficient to give entitlement to consortium relief. Therefore, we do not think that it follows that the analysis applied to group structures in the Marks and Spencer case also applies to consortium structures.
I may have said “£5 million” on the potential cost; I meant to say £50 million, so my apologies for that. I am sure that the hon. Lady is aware that a cost would be involved were we to accept the amendments. We do not think that they are necessary to comply with our EU obligations; we are successfully doing that as the clause currently stands, and also minimising the cost to the UK Exchequer. For those reasons, I hope that she will withdraw the amendment.
I beg to move amendment 21, in schedule 6, page 58, line 5, after ‘directly’, insert ‘or indirectly.’.
The amendment looks at the limitation of group relief based on the proportion of voting power held by a company. In tabling probing amendment 21, which simply adds the words “or indirectly” after “directly”, we pose the question as to why there should be limitations on group relief based on the proportion of voting power held by a company. It has been suggested that the schedule as drafted, which includes only directly possessed companies, could deny consortium claims in many legitimate circumstances and possibly in every case where there is a holding company.
We have looked at Budget note BN14, which has no explanation as to why the measure is restricted to directly possessed holdings. I would be grateful if the Minister clarified why that requirement is being introduced and set the Committee’s mind at rest as to whether legitimate claims would be excluded if the provision was to be accepted as it currently stands in the Bill.
I will illustrate my point with another example. I apologise in advance for its complexity, but it is unavoidable if I am to try to get the point across and get on the record how this would work in practice. Suppose that company A is a member of a consortium and owns 50% of company B, which is a holding company, and company B owns 100% of company C, which is a trading company. Company A wants to claim losses from company C.
Even if all the other conditions for the claim are satisfied, the new condition in section 143(3)(d) will arguably always deny a consortium claim, because the claimant company, company A, will not directly possess—as the wording in the schedule as drafted states—any of the voting powers of the surrendering company, company C. The same issue arises when A is the surrendering company and C is the claimant company, hence this probing amendment, which states that indirectly owned companies should be included in the provision.
The Minister may argue that section 153(3) of the Corporation Tax Act 2010 deems the consortium members to possess directly already the voting power in company C. It is by no means clear, however, that that would be accepted if it was subjected to legal challenge. I would suggest, therefore, that rather than using the term “directly possessed”, the schedule should use “directly or indirectly possessed”, so that the voting power can be traced through the holding company.
Alternatively, “directly possessed” should be explicitly defined, with a reference to section 153(3), to put the point beyond doubt. I would be grateful if the Minister clarified whether he has taken legal advice on that point, and whether he believes that the provision as currently drafted serves the purpose that it is intended to serve.
As we have heard, amendment 21 would alter the test limit of the allocation of losses that may be claimed or surrendered between a consortium company and a consortium member. It would extend the new test so that it included both indirectly and directly held voting power.
The Government are introducing the measure to counter avoidance. HMRC has been made aware of several schemes that have taken advantage of the rules as they stand. As with all anti-avoidance legislation, the Government are committed to ensuring that genuine commercial transactions are not affected. We have taken on board comments received during the consultation period over the summer to make sure of that.
The amendment, however, would loosen the legislation unnecessarily and weaken the avoidance rules. Including indirect voting power would mean that the voting power held by subsidiary companies could be attributed to a consortium member. While that would extend the percentage entitlement to losses in some limited situations, it would open the avoidance window that we are looking to close. Tax avoidance opportunities would continue, and I am sure that that is not the intention of Opposition Members, although I understand that this is a probing amendment.
If we were not to tighten this particular area, the cost would be likely to be somewhere in the region of £30 million a year. Amendment 21 would broaden the entitlement to losses for some consortium members in complicated situations, but it would also allow the continuation of the avoidance schemes that we wish to close. Extending the measure to indirect voting power would prevent the attribution of a subsidiary’s holding. A subsidiary can, if conditions are met, make its own claim and, in such situations, there is no disadvantage. We have made changes in response to consultation comments, but the change proposed in the amendment would weaken the legislation unnecessarily, so I ask the hon. Lady to withdraw it.