The clause relates to de-grouping charges and amends measures in the Corporation Tax Act 2009 that apply to groups of companies. It will amend the de-grouping provisions in those sections of the 2009 Act that apply when a company to which a loan relationship or derivative contract has been transferred ceases to be a member of the group.
The stated policy aim is to support the Government’s objective of establishing
“a simpler, more certain and more robust tax system.”
In technical terms, the clause will repeal provisions in sections 345, 346, 631 and 632 of CTA 2009 that have the effect of restricting the de-grouping charge so that it brings into account credits and certain debits only in limited circumstances. Under the changes, where a transferee company ceases to be a member of a group on or after 1 April 2014, the rules will apply to bring into account both credits and debits for taxation purposes.
Again, the background to the clause relates to group continuity rules, which ensure that loan relationships and derivative contracts are transferred between two companies in the same group at a notional carrying value —in other words, their notional balance sheet value at the time of transfer—and on a tax-neutral basis, in other words without crystallising losses or bringing gains into the charge. Profit or loss on the loan relationship or derivative is not brought into account for tax purposes until the instrument is finally disposed of from the group.
Where a transferee company ceases to be a member of the group within six years of the date of transfer, a de-grouping charge is incurred, which brings into account an amount equal to the difference between the notional carrying value and the fair value of the loan relationship or derivative contract for tax purposes. However, in most cases the de-grouping charge applies only in limited cases, and only to bring credits, not debits, into charge. At Budget 2013, the Government announced a review of the legislation governing the taxation of corporate debt—the loan relationships—and derivative contracts. The aim of the review was to make the legislation simpler, more certain, and more resistant to abuse.
Once again, we are not seeking to remove the clause from the Bill, but there are a couple of points that I wish to make, and I have some questions for the Minister. As I said, the clause extends the de-grouping charge to cover both credits and debits on loan relationships and derivative contacts in the event of de-grouping, by removing a number of the subsections in CTA 2009. The Government are right to take action to restrict the scope for tax avoidance, especially given that the Exchequer has potentially lost out on significant sums; we have already heard some comment about that. Additionally, given the complexity of the taxation regime, any efforts to introduce greater simplicity and transparency would, of course, be welcomed.
However, the Government have stated in their policy note that the economic impact of the measures, including on the Exchequer, will be negligible; will the Minister confirm that? If the impact is negligible, can she confirm that she does not expect the measures to raise any additional revenue for the Exchequer? Given the discussions that we are having about the success or otherwise of the tax avoidance measures and about trying to rein in tax avoidance, can she explain whether the clause has any tangible impact?
I heard what the hon. Member for Daventry said about the full report of the Public Accounts Committee, but none the less, one of the things that came through from the report was the issue of trying to gather intelligence on the full cost of tax avoidance schemes. Can the Minister say whether it is her intention to undertake any more of that activity and, if so, to present the results to Parliament?
Clause 28 makes a change to the corporation tax rules on corporate debt in derivative contracts. It arises from a consultation that the Government launched in June last year on the modernisation of these rules. Consultation has been proceeding since then with a wide range of companies, representative bodies and other interested parties. It has been broadly welcomed by business. This change, which will ensure that certain profits and losses are treated consistently, is being made in advance of wider changes to the regime that will be included in the 2015 Finance Bill.
The changes made here will amend what are referred to as the de-grouping provisions. These rules apply when a loan or derivative is transferred to a company and that company ceases to be a member of a group. Currently, when a loan or derivative is transferred from one company to another in the same group, the rules provide that no tax losses are realised and no gains are taxed. The profit or loss on the loan relationship, or derivative, is not brought into account for tax purposes, unless that financial instrument is later disposed of out of the group.
Where the company acquiring the financial instrument ceases to be a member of the group within six years of the date of the transfer, there is a deemed disposal and re-acquisition of the asset or liability. The effect of this de-grouping charge is that an amount equal to the difference between the carrying value and the market value of the loan or derivative is brought into account for tax at that point. However, unlike equivalent rules in other areas of tax, this charge in most cases applies only one way: profits are brought into charge, but losses are severely restricted. That is, it can increase, but not decrease, the amounts taxed. This feature of the rules is an anomaly, unnecessarily complicates current legislation, and provides no additional protection against avoidance.
The changes made by the clause will remove this anomaly in the current legislation. The clause repeals provisions that restrict losses on loans and derivatives that are brought into account when a company leaves a group. Where this takes place on or after 1 April 2014, the rules will apply to bring into account both profits and losses. This is in keeping with the proposals set out in the consultation document published last year. It will simplify the legislation and help to make it more robust against avoidance, by discouraging schemes that seek to use the rules to transfer tax losses.
In answer to the hon. Lady’s question as to whether there will be any additional revenue from this, the measure does not address a particular avoidance scheme and does not, therefore, give rise to any quantifiable Exchequer yield. The measure is, in fact, part of an extensive and ongoing consultation on the corporation tax rules on corporate debt and derivatives, which will continue over the next year. Her Majesty’s Revenue and Customs will monitor the impact of the change through its engagement with a wide range of stakeholders who are part of the consultation, as well as through its normal risk assessment and inquiry procedures.