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Clause 26 - Release of debts: stabilisation powers under Banking Act 2009

Finance (No. 2) Bill – in a Public Bill Committee at 3:30 pm on 6th 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)

It is a pleasure to be in Committee again, Mr Streeter, and thank you for your comments about the two Front-Bench teams. My hon. Friend the Member for Scunthorpe is the token male on this occasion, but he does a fine job and we are pleased that he is with us on the Front Bench.

The clause is about the release of debts. It will amend the corporation tax rules on loan relationships that apply to cases in which credits are not required to be brought into account on the release of debts. The cases covered include when a debt is released as a result of the application of any of the stabilisation powers under part 1 of the Banking Act 2009.

The existing rules ensure that a debtor company released from a debt as part of an insolvency arrangement is not taxed on the profit arising from the release so that, in effect, the transaction is tax-neutral and the debtor is not penalised for release from a debt obligation, as that would be counter-productive. The change will ensure that resolution by the Bank of England, which is a form of such arrangements, is treated in the same way.

The background to the measure is that section 322 of the Corporation Tax Act 2009 exempts a company that is party as a debtor to a loan relationship—a debtor relationship is any loan relationship in which the company is the debtor, which is the borrower of money or the issuer of security—from a credit arising on the release of that debt when one of three conditions is met: the release is part of a statutory insolvency arrangement; it is in consideration of shares, or any entitlement to such shares; or if the debtor meets one of the insolvency conditions, such as insolvent liquidation, administration and administrative receivership, or there is the appointment of a provisional liquidator or an equivalent procedure outside the UK. The clause adds the condition that liability is released in consequence of the exercise of a stabilisation power under part 1 of the Banking Act 2009, which is known as the special resolution regime.

The change was flagged up in the other place in November 2013, when Lord Deighton commented:

“the exercise of any of the stabilisation powers under Part 1 of the Banking Act 2009 to reduce a bank’s debt may lead to taxable loan relationship profits that would hinder its rescue. Consequently we will bring in measures in the next Finance Bill, with retrospective effect to this date, to relieve any such taxable profits that arise.”—[Official Report, House of Lords, 26 November 2013; Vol. 749, c. 1332.]

We do not intend to oppose the clause.

Photo of Andrea Leadsom Andrea Leadsom The Economic Secretary to the Treasury

It is a great pleasure to be serving under your chairmanship, Mr Streeter.

As the hon. Member for Kilmarnock and Loudoun says, the clause is a consequential change to the corporation tax rules on corporate debt that apply to cases in which credits are not required to be brought into account on the release of debts. The measure was announced by the Commercial Secretary to the Treasury on 26 November 2013 during the passage of the Financial Services (Banking Reform) Act 2013.

The clause will amend the corporation tax rules on loan relationships in part 5 of the Corporation Tax Act 2009. The change will apply to any bank or other financial institution subject to the application of any of the stabilisation powers under part 1 of the Banking Act 2009, and it will ensure that when a debt is released as a result of the application of any of those stabilisation powers, the debtor will not be required to bring into account the resultant credit. That will put banks and other financial institutions in the same position as other companies that enter into statutory insolvency arrangements.

I am delighted that the Opposition will not be objecting to the clause, so let me conclude by saying that the existing rules ensure that a debtor company that is released from a debt as part of an insolvency arrangement is not taxed on the profit arising from that release. The change will support fairness in the tax system by ensuring that resolution by the Bank of England, which is a form of such arrangements, is treated in the same way, and it will support financial stability by ensuring that the tax consequences of any future resolution can be dealt with in an orderly way. I commend the clause to the Committee.

Question put and agreed to.

Clause 26 accordingly ordered to stand part of the Bill.