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Clause 58 - Capital gains roll-over relief: intangible fixed assets

Finance (No. 2) Bill – in a Public Bill Committee at 10:45 am on 13th May 2014.

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

Photo of Shabana Mahmood Shabana Mahmood Shadow Minister (Treasury)

Clause 58 is another rewrite to correct a tax law error, such as the one we discussed in connection with clause 55. In this case the error appears to have gone unnoticed for a lot longer—five years after the original legislation was passed. The clause concerns roll-over relief on the disposal of tangible assets, where the proceeds are reinvested in replacement and tangible fixed assets. A tangible asset includes both fixed assets, such as machinery, buildings and land, and current assets such as inventory. An intangible asset covers not only intellectual property, such as patents, copyrights, trade marks and know-how, but a variety of other assets with commercial value, such as agricultural quotas, payment entitlements under the single payment scheme for farmers, franchises and telecommunication rights.

The intent behind the law, which we support, was to deny roll-over relief in those circumstances, but a drafting mistake in the tax law rewrite in 2009 appears inadvertently to have reinstated the relief. The effect of the clause is to make clear in law that roll-over relief is not available on such transactions. As I mentioned earlier, it has taken five years for this to come to notice. I am interested to know when the Minister was made aware of the need for the change and whether it only recently came to light. How many companies have taken advantage of this error in law? Has there been any loss to the Exchequer as a result? Will the Minister tell the Committee whether there are any current court cases going through the tax tribunal system that might be affected by the measures in clause 58?

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 58, as we have heard, corrects an error in legislation rewritten in 2009, arising from the tax law rewrite project. The changes made by clause 58 ensure that companies are not able to claim capital gains roll-over relief where the proceeds from the disposal of a tangible asset, such as a property, are reinvested in an asset taxed under the intangible fixed asset rules. Intangible fixed assets include goodwill and certain types of intellectual property such as trade marks, patents, design and copyright. The clause also ensures that there can be no double relief given on or after 19 March 2014 for earlier claims. It does so by taking into account any roll-over relief already given when calculating future relief under the intangible fixed asset rules.

Let me briefly set out some background. The Finance Act 2002 introduced a new tax regime from 1 April 2002 for companies’ intangible fixed assets. The new treatment generally follows the accounting treatment rather than treating them like other capital assets. Capital gains roll-over relief was withdrawn where the proceeds from a disposal of assets charged as a capital gain were reinvested in intangible fixed assets acquired on or after 1 April 2002.

The roll-over provisions were partly rewritten in 2009 as part of the tax law rewrite project. Regrettably, it has now come to light that the rewritten provisions contain an error and could be interpreted as undoing the 2002 provision dealing with roll-over relief. That interpretation is not only incorrect but contrary to the intentions of Parliament, so we are taking steps to put matters right. Changes made by clause 58 are effective from 19 March 2014, the date on which HMRC published the draft legislation. The clause corrects the drafting error in the capital gains roll-over relief provision to prevent future claims and restore the legislation to what was intended by Parliament. Clause 58 also amends the intangible fixed asset rules to ensure that where roll-over relief has been given in error, the amount of relief is taken into account when companies claim future relief under the intangible assets rules, which will prevent double tax relief from being given from 19 March 2014.

The clause is not expected to have any wider economic impact. Very few companies are known to be affected by the change, because most have operated the rules as Parliament intended. HMRC is aware of one case in which roll-over relief has been claimed contrary to the rule that existed before 2009.

Shabana Mahmood rose—

Photo of David Gauke David Gauke The Exchequer Secretary

I will give way in a moment. There are no court cases as yet; HMRC has challenged that one known case, but the matter has not yet gone to court. I give way to the hon. Lady.

Photo of David Gauke David Gauke The Exchequer Secretary

Excellent. On the question of how the error arose, HMRC was made aware of it only at the beginning of 2014. There is no cost to the Exchequer because HMRC is challenging the interpretation in the one case that I have mentioned.

Question put and agreed to.

Clause 58 accordingly ordered to stand part of the Bill.