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It will not be the last, I confess.
Clause 24 makes changes to the sale of lessor company legislation to ensure that it remains effective. The sale of lessor company provisions were introduced to prevent groups from turning a temporary tax timing benefit into a permanent tax saving. Companies carrying on a business of leasing plant or machinery are able to defer profits for tax purposes through a claim to capital allowances. In many instances the capital allowances produce tax losses in the lessor company, which can then be used by the wider group to reduce its taxable profits.
Prior to the introduction of the sale of lessor provisions in the Finance Act 2006, the company could be sold to a loss-making group once the allowances were exhausted and the company was about to become tax profitable. Once in the loss-making group the tax profits could be reduced by the new owner’s losses. The sale of lessor provisions address the risk that the leasing profits might escape taxation in the new ownership by bringing an amount equivalent to the deferred profits into charge. After the sale a matching expense restores the timing benefit to the lessor company and prevents the deferred profits from being taxed again.
The changes introduced by the clause will target known schemes involving big ticket leases, where substantial amounts of tax could be at risk. The changes were announced at Budget 2012, with immediate effect to prevent forestalling and to protect other revenues at risk; draft legislation was also published. However, we have continued to engage with industry groups. That is why we have tabled amendments 15 to 22, which will preserve the intent of the clause, while preventing unintended consequences.
The first change introduced by the clause will prevent the lessor company from carrying back losses arising after the sale against profits derived from the sale of lessors charge. Using those losses against the charge means that the selling group keeps the timing benefit that it has enjoyed. However, the Exchequer has to wait until the losses of the buying group, augmented by the sale of lessors relief, are exhausted before tax can be collected on the deferred profits. The restriction will restore the intended effect of the legislation, in that it will prevent the temporary tax timing benefit from becoming a tax saving.
The second change targets arrangements that exploited a mismatch in definitions, which allowed a ship leasing company to join a tonnage tax group that included the lessee company without breaking its existing group relationship. No charge was calculated under the sale of lessors provisions and the lessor company was able to enter tonnage tax, where profits are computed for tax purposes on the basis of the tonnage of the ship and not on the normal corporation tax basis. As a result, profits deferred for tax purposes up to that point would have fallen out of charge unless special rules within the tonnage tax regime operated to calculate a balancing charge for an asset sold shortly after entry. As introduced, the clause countered that arrangement by triggering the sale of lessors provisions when the company entered tonnage tax.
Representatives of the shipping industry pointed out that that approach could affect companies that entered tonnage tax in circumstances where there is no change in group membership, the lessor company having always been a member of the same tonnage tax group. Amendments 15 to 22 address that, so that the clause will now ensure that, for the purposes of the sale of lessors provisions, there will be a change of ownership when a lessor company enters a tonnage tax group. The amendments will also prevent the possibility that profits could be taxed twice, by preserving any unused relief calculated under the provisions for use against certain balancing charges arising after the company enters tonnage tax.
The changes target contrived arrangements and situations in which there is a risk that tax on profits will be lost, and they preserve the revenue protection provided by the sale of lessors provisions. I hope that the clause will stand part.
I wish to comment on clause 24 in its entirety and on all the amendments. Earlier, my hon. Friend the Member for Bassetlaw pre-empted the Minister’s introduction of this first set of Government amendments and eloquently stated his frustration at the Government’s having to table such amendments at this stage. I accept that the amendments fall within the remit of clarification rather than of U-turn, which I am sure is a relief for the shipping industry and members of the public.
There has been no formal consultation process on the Bill, which explains why the amendments are necessary. The Government have justified having no consultation on the need to take quick action to implement a revenue-protection measure, which is a laudable aim. However, following the discussions with the shipping industry that the Minister has outlined, the amendments were tabled to obviate significant unintended consequences for companies, including the possibility of a potential double charge in certain circumstances. Will the Minister say whether the HMRC is now satisfied that, despite the lack of consultation on the clause and aside from discussions with the shipping industry about the amendments, the changes will not unfairly impact on relevant stakeholders? Does not the fact that the shipping industry felt moved to seek amendments to the clause show that some form of formal consultation prior to implementation was needed?
Given that there has been no consultation, has HMRC at least investigated how many businesses are involved in this type of tax avoidance? Has it investigated how many businesses have moved from the corporation tax method to the tonnage tax method as a result? Lastly, the impact note sets out the projected figures for the clause’s Exchequer impact up to 2017, but no calculation has been provided for how much revenue the scheme could bring in. Will the Minister share that information with the Committee today?
I am grateful for the hon. Lady’s questions. She asked about consultation, and to a large extent, answered her own question by making it clear that this is anti-avoidance legislation. Such measures have a risk of forestalling, and the Government have taken many steps to increase the amount of consultation and the publication of draft legislation. By and large, most draft legislation is published in November and December in advance of the Finance Bill the following year, which gives interested parties an opportunity to analyse it and draw HMRC and the Treasury’s attention to any unintended consequences or weaknesses in the drafting. That step taken by the Government has been widely welcomed, and it has contributed towards an improved quality of legislation.
However, there are difficulties with anti-avoidance measures because of the danger of forestalling. Publishing a measure for consultation without bringing an anti-avoidance measure into effect can, in some circumstances, put tax at risk. Having said that, even when the Government have been required to act quickly, we have been willing to listen and take action where necessary in response to any concerns that have been expressed.
We are content that the measure is appropriately targeted. It is supported by the shipping industry, which is content with the clause as amended by amendment 15, and amendments 16 to 22. The measure effectively targets the avoidance risk and will not have an impact on commercial situations, which means that we now have the appropriate legislation.
In answer to the hon. Lady’s question about cost, or rather, the additional revenue that will be raised, we are talking about small sums of money. We are not making great claims. The impact assessment suggests that it is a negligible sum. It is more about protecting revenue in future, rather than bringing in additional sums. However, although the measure is designed more for revenue protection than anything else, it is none the less important that we protect revenue where we can.
The hon. Lady also asked about the scale of the impact and the number of companies that are likely to be affected, but I cannot give her the precise number. The provision only protects revenue, rather than raises additional sums, so it is difficult to make a precise assessment of the numbers that are likely to be affected. However, if I am able to provide additional information, I am happy to write to her and provide further clarification.
Amendments made: 16, in clause 24, page 15, line 34, leave out ‘moving into tonnage tax’ and insert ‘joining tonnage tax group’.
Amendment 17, in clause 24, page 15, line 36, leave out from ‘if’ to end of line 38 and insert ‘—
(a) on that day A becomes a member of a tonnage tax group for the purposes of Schedule 22 to FA 2000 without entering tonnage tax on that day, or
(b) the day ends immediately before the day on which, for the purposes of that Schedule, A both becomes a member of a tonnage tax group and enters tonnage tax.”’.
Amendment 18, in clause 24, page 16, line 26, leave out ‘moving into tonnage tax’ and insert ‘joining tonnage tax group’.
Amendment 19, in clause 24, page 16, line 28, at end insert—
‘(7A) In Schedule 22 to FA 2000 (tonnage tax), after paragraph 79 insert—
79A (1) This paragraph applies if—
(a) a balancing charge under this Part of this Schedule arises to the company on the disposal of any plant or machinery, and
(b) the plant or machinery is taken into account in calculating income that the company is treated as receiving under section 383 or 417 of the Corporation Tax Act 2010 (sales of lessors) as a result of section 394ZA of that Act (company joining tonnage tax group).
(2) The balancing charge is to be reduced by the relevant part of the sales of lessors expense so far as relief has not previously been given for that expense (whether under this sub-paragraph or otherwise).
(3) “The sales of lessors expense” means—
(a) the expense which the company is treated as incurring under section 383 or 417 of the Corporation Tax Act 2010 as a result of section 394ZA of that Act, or
(b) if section 386 or 419 of that Act applies or has applied, the expense which derives from the expense within paragraph (a).
(4) If the sales of lessors expense is incurred at a time when the company is in tonnage tax, the “relevant part” of that expense is so much of it as, on a just and reasonable basis, is attributable to the matters set out in paragraph 56(1)(a) or (b).
(a) the sales of lessors expense is not incurred at a time when the company is in tonnage tax,
(b) that expense is taken into account in calculating a loss made by the company in a trade, and
(c) the loss is one to which paragraph 56 applies,
the “relevant part” of the sales of lessors expense is so much of the apportioned loss as, on a just and reasonable basis, is derived from the sales of lessors expense.
(6) The reference here to the apportioned loss is to the loss that is attributable to the matters set out in paragraph 56(1)(a) or (b).”’.
Amendment 20, in clause 24, page 16, line 30, leave out paragraphs (a) and (b) and insert—
‘(a) where the income arises as a result of a company becoming a member of a tonnage tax group on or after 21 March 2012 and entering tonnage tax at the same time,
(b) where the income arises as a result of a company becoming a member of a tonnage tax group on or after 23 April 2012 without entering tonnage tax at the same time, or
(c) where the relevant day is on or after 21 March 2012 (in any case not within paragraph (a) or (b)).’.
Amendment 21, in clause 24, page 16, line 33, leave out from ‘(5)’ to end of line 35 and insert ‘and (7A) have effect—
(a) where a company becomes a member of a tonnage tax group on or after 21 March 2012 and enters tonnage tax at the same time, or
(b) where a company becomes a member of a tonnage tax group on or after 23 April 2012 without entering tonnage tax at the same time.’.
Amendment 22, in clause 24, page 16, line 36, leave out from ‘effect’ to end of line 37 and insert ‘—
(a) except in a case within paragraph (b), where the transfer day is on or after 21 March 2012, and
(b) in a case where the relevant change in the relationship occurs as a result of a company becoming a member of a tonnage tax group without entering tonnage tax at the same time, where the transfer day is on or after 23 April 2012.’.—(Mr Gauke.)