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Clause 13 - Relief for loan interest: loan to buy interest in close company

Finance (No. 2) Bill – in a Public Bill Committee at 2:30 pm on 1st May 2014.

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Question proposed, That the clause stand part of the Bill.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I hope we will be able to make some speedy progress on clauses 13 and 14, because we have not gone for any radical departures from tradition and have not tabled amendments or new clauses.

Clauses 13 and 14 introduce changes that are required to comply with European Union law. I mention that not to cause any controversy—I am sure Government Members will not rise to that bait—but simply to explain that clause 13 extends the income tax relief for interest paid on loans to buy an interest in a close company to interest paid by individuals investing in companies that are resident in the European economic area and would be close if they were resident in the UK.

A company is defined as “close” if it is controlled by five or fewer participants or any number of directors who are participators, or if more than half the company’s assets would be distributed to five or fewer participants or to any number of directors in a winding-up. The change to the definition of a close company for the purposes of the relief has therefore been made to ensure that the legislation is compatible with EU law.

Clause 13 also includes the definition of a close investment holding company, which was previously contained in the Corporation Tax Act 2010. Prior to 2015, the taxable profits for a close investment holding company were not allowed to use the small companies’ rate of corporation tax. However, from 1 April 2015, there will no longer be a difference in the corporation tax rate for small and large companies, and so the definition in CTA 2010 will no longer be needed.

I want to ask the Minister some brief questions. First, what assessment has been made of the impact of the changes on levels of investment in companies defined as close companies in the UK? What assessment has been made of the potential for the changes to be used for tax avoidance purposes? We had a discussion earlier on how important it was to close any loopholes. How do the Government propose to check compliance with the strict close company rules throughout the EEA? What measures will be put in place to check on, for example, the setting up of close companies in other EEA countries by UK taxpayers to exploit any of the new rules? Is the Minister able to give us information on what figures the Government have used to assess the potential Exchequer impact of the measure?

As I outlined, we do not intend to vote against clause 13. We understand that it is to bring our legislation into line with EU law, but it would be helpful if the Minister could give us some information on the brief points I have raised.

Photo of Martin Caton Martin Caton Labour, Gower

Before I call the Minister to respond, I must correct the result of the last Division. The Ayes were 16, not 17. That makes no difference to the result of the vote.

Photo of David Gauke David Gauke The Exchequer Secretary

We will accept 16-11 as sufficiently crushing.

Photo of Chris Heaton-Harris Chris Heaton-Harris Conservative, Daventry

On a point of order, Mr Caton. I think it was the Noes that had 16 rather than the Ayes.

Photo of Martin Caton Martin Caton Labour, Gower

You are correct. I apologise.

Photo of David Gauke David Gauke The Exchequer Secretary

I am grateful to my hon. Friend the Member for Daventry. A result of 17 Ayes to 11 Noes would have been crushing in the wrong way.

Clause 13 makes changes to ensure that income tax relief for individuals paying loan interest complies with EU law. The income tax relief for payments of interest on loans to acquire an interest in a close company was introduced in 1969. A close company is a company controlled by shareholders who are also directors, or by a small number of shareholders. If companies borrow in their own right and pay loan interest, they get a deduction in working out their profits for tax. Not all companies, however, have ready access to finance. The rules provide for individual investors to get relief on the interest paid on the loans that they take out to invest in a close company. At present, the relief applies to interest paid on loans taken out for investment in UK resident companies only.

Clause 13 will extend the relief so that it applies to investment in a close company wherever in the European economic area it is resident. That is part of the internal market, and the change will assist the performance of the internal market. The change made by clause 13, together with the change made by clause 14, is likely to affect fewer than 10,000 people, who will be eligible to claim relief for interest payments on qualifying loans. Extending the relief is expected to have little practical impact. It is in fact fairly easy to use the current relief to invest in a branch trade elsewhere in the EEA.

The combined cost of extending the reliefs through clauses 13 and 14 is therefore expected to be low—£15 million in 2015-16 and £10 million in later years—which answers the question of the hon. Member for Kilmarnock and Loudoun. The limit on income tax reliefs, which was introduced in the Finance Act 2013, applies to those reliefs and will continue to apply, as will the anti-avoidance rules that currently apply to the income tax relief for loan interest. On her question of whether the measure opens up new avoidance opportunities, the answer is no.

Clause 13 also makes a minor technical change to existing legislation to ensure that it continues to work as intended. That involves the definition of close investment holding companies. The effects of the legislation are not altered by the change. The clause makes necessary changes to ensure that the rules for income tax relief for individuals paying loan interest comply with EU law. I therefore hope that the clause will stand part of the Bill.

Question put and agreed to.

Clause 13 accordingly ordered to stand part of the Bill.