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Clause 36 - Changes in company ownership

Finance (No. 2) Bill – in a Public Bill Committee at 11:30 am on 8th May 2014.

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

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 11:45 am, 8th May 2014

We now come to some rather technical clauses. Clause 36 contains provisions on changes in company ownership. The Chancellor announced in the 2013 autumn statement that the Government would introduce measures to bring the UK loss relief rules on corporation tax more up to date with modern commercial practice. The clause therefore amends and supplements existing corporation tax provisions to ease the rules restricting the availability of relief for corporation tax trading losses when companies change ownership.

I will leave it to the Minister to outline the Government’s reasoning for bringing forward the clause, but I have one or two brief questions to put to him for clarification. The tax information and impact note highlights how these measures will benefit businesses, yet does not provide much more information than that. It states:

“Although there will be a negligible one-off cost of familiarisation, the measure will provide greater flexibility to make company ownership changes so will be welcomed. Overall, the impact of the measure on businesses and civil society organisations will be negligible.”

Will the Minister elaborate on the tax information and impact note and inform the Committee how many investment businesses, following ownership changes, would have avoided the loss relief restrictions had they previously been relaxed? It would be useful to get a greater understanding of how many investment businesses might benefit from the changes in the clause, based on previous trends.

On the proposed new section, which is designed to prevent abuse of the easement, it would be helpful if the Minister informed the Committee how many companies have previously been caught out by loss relief restrictions where a new holding company has been inserted on top of a group of companies. Clearly the provisions were originally intended as anti-avoidance measures. Indeed, the Government introduced three new clauses to last year’s Finance Bill to strengthen anti-avoidance measures on loss reliefs from company ownership changes. Considering that, and the fact that the tax gap rose last year to £35 billion, will the continuity rules, which will continue to apply to holding company shareholders throughout the transaction, be sufficient to prevent abuse, as the tax information and impact note so confidently claims?

Photo of David Gauke David Gauke The Exchequer Secretary

It is a great pleasure to serve under your chairmanship this morning, Mr Caton.

Clause 36 makes changes to company losses anti-avoidance legislation, which potentially restricts a company’s ability to set brought-forward trading losses against future profits if the company changes ownership. There are two changes to the rules, both of which bring the legislation up to date with modern commercial practice. Let me first set out a little background to the clause. The rules that potentially restrict brought-forward losses being used after a company changes ownership have not seen significant amendment for many years. However, modern commercial practice involves more complex restructuring arrangements and increases in capital than were common in the mid-1990s. More flexibility in the rules was required to prevent genuine commercial arrangements from being caught by the legislation, and this clause is the result.

The changes that the clause makes are twofold. The first will allow a holding company to be added to the top of a group structure. Under current legislation, such a transaction would be treated as a change in company ownership and so potentially trigger the anti-avoidance rules. The second change will allow a company with investment business to increase its capital after a change of ownership by a much greater margin before the anti-avoidance rules are triggered. The changes will have effect for changes of ownership on or after 1 April 2014. This will affect any company changing ownership, especially those with investment business. As the tax information impact note makes clear, the cost to the Exchequer will be negligible.

The hon. Lady essentially raised two points. First, she asked about the number of businesses likely to be affected that were previously caught up by the legislation, despite having commercial arrangements that were not intended to be caught up by it. The view in the Treasury and HMRC is that we anticipate that this will be a relatively small number. I cannot give any more information than that at this stage. If it is possible for us to determine more precisely how many businesses were caught up, I will certainly write to the hon. Lady, setting out those details. At the moment, we are talking about a relatively small number.

Secondly, the hon. Lady asked whether the measure could open up an opportunity for avoidance and whether we were weakening anti-avoidance legislation. Let me reassure her that we are confident that there is no weakening of the intended scope of the change of company ownership rules in part 14 of the Corporation Tax Act 2010. The situations that the clause would deal with are commercial, but could be caught by the rules as they stand, which would be an unintended consequence of the rules.

Finally, let me correct a comment made by the hon. Lady. As far as the tax gap is concerned, the most recent numbers that are available show that it fell as a percentage of liabilities. I am sure that she would not want to give an impression to the contrary.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Just to clarify exactly what I said, the figure has increased to £35 billion. There was nothing inaccurate in my comment.

Photo of David Gauke David Gauke The Exchequer Secretary

For the sake of completeness, I am grateful for the hon. Lady’s intervention. I think her point was that although there was a cash increase of £1 billion, the tax gap fell as a percentage of tax liabilities. I am glad that we have got that clarified and on the record.

Question put and agreed to.

Clause 36 accordingly ordered to stand part of the Bill.