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

With this it will be convenient to discuss clause 21 stand part.

Clauses 20 and 21 will prevent companies from claiming unfair tax relief on their intellectual property. Clause 20 will ensure that income received in non-monetary form is fully taxed under the intangible fixed asset regime, and clause 21 will amend the rules where a licence in respect of intangible fixed assets is granted between related parties.

The clauses tackle arrangements where companies sell intellectual property assets or grant a licence in respect of intellectual property, and try to gain a tax advantage by receiving shares or some other form of consideration—what is known as money’s worth rather than cash. Accounting rules can mean that a disposal is accounted for by the seller at the original or base cost of the asset disposed of—effectively, the book value of the asset disposed of—rather than the actual value of what has been received.

That type of accounting is used by related parties in what are known as step-up avoidance schemes to create a difference between one company’s taxable income and another company’s tax deduction. In step-up schemes involving licensing arrangements, the licensor accounts for the disposal at the lower net book value and is not taxed on the full value of the consideration, while the licence recognises the higher or stepped-up commercial value of the asset acquired and claims tax relief on the higher amount. Such transactions can occur commercially when setting up joint ventures but can also be used for avoidance and can involve intellectual property leaving the United Kingdom.

There are several reasons why multinational enterprises may move their intellectual property between companies in a group. The Government’s view is that the rules should ensure that the right amounts are taxed and deducted when intellectual property is moved. Clause 21 will ensure that that always happens, including when intellectual property leaves the United Kingdom.

The changes that clauses 20 and 21 will make are fairly simple. They will counter step-up avoidance schemes by ensuring that all non-cash disposals and related party licensing arrangements are taxed fairly, consistently and in line with cash transactions. They will have no effect on the vast majority of trades because transactions set up in such a way are rare; in many cases they are set up to gain an unfair tax advantage. The clauses will apply retrospectively from 22 November 2017. I commend them to the Committee.

The Opposition have not tabled any amendments to clauses 20 and 21, but I have a question for the Minister about a specific matter that I raised briefly on Second Reading. It was not satisfactorily resolved at the time, so with the Committee’s permission I will raise it again.

I am grateful to the Minister for his explanatory remarks, but a pertinent question remains. As I said on Second Reading, the clauses essentially grab at what in many cases may be the holy grail: the assigning of market value to certain kinds of intangible for tax purposes. In that regard, the clauses seem to contradict the direction of travel in the Finance (No. 2) Act 2017, in which the tax impact of intra-group transactions was limited rather than regulated—I refer specifically to the measures to restrict the tax deductibility of interest payments to intra-group companies. Hon. Members will remember that the Government decided on a limit of 30% of earnings before interest, taxes, depreciation and amortization, which was the upper bound of the OECD’s suggestion. We questioned that, but at least they adopted the OECD position of restricting such payments. However, rather than limiting the admissibility of intra-group payments as a means of reducing tax, the Bill attempts to regulate their calculation. I think such an attempt may be flawed.

The Minister has covered this to some extent, but let me provide some further background. Related parties, including subsidiaries, affiliates, joint ventures or associated companies, may transfer among themselves intangibles such as patents, know-how, trade secrets, trademarks, trade names, brands, rights under contracts or Government licences and other forms of intellectual property. The attempt to regulate market value may be flawed because it assumes a market value for such intangibles. For most people, the image underlying such a view is one of an active market with buyers and sellers in it, but there is often no such market for intangibles that are transferred—sometimes entirely legitimately, but sometimes as an attempt to pay less tax by shifting to a lower-taxed or differently taxed jurisdiction. For example, I have been looking at statistics on global biotech. As I understand it, about 10 corporations control two thirds of the industry, including the intellectual property in it, so there is no normal market and enormous mental gymnastics are necessary to determine the market value of intangibles.

Firms that wish to exploit the situation can make rather wild claims. I hope Committee members will remember as a particularly egregious example the facts revealed by the European Commission’s case against Starbucks, in which vastly inflated assessments were made of the value of intellectual property held by a firm that had no employees. However, the Starbucks case was unusual in the sense that such manipulations of the value of intangibles normally remain, sadly, unchallenged. In connection with that, I understand that HMRC had, as of 2016, just 81 transfer pricing specialists. Surely that is dwarfed by the number of advisers employed by the big four firms who, potentially, would advise large companies that might well seek to reduce their tax perfectly legally by manipulation of the location of intangible assets into lower-tax jurisdictions.

Clauses 20 and 21 do not define intangible fixed assets. In accounting terms, of course, an asset is something that generates future cash flows, revenues or benefits, but there are no other qualifying criteria. The woolliness of such a definition has been recognised in the courts as problematic. For that and many other reasons, the European Union is moving towards a unitary system of corporate taxation. I appreciate that that is a matter for another day, so I will not open a discussion on it now—probably no political party would want to state its position on it in a Finance Bill Committee. We should note it here, however, because it indicates how our country may be merely entrenching problems that the EU27 are moving towards resolution.

Will the Minister introduce legislation to provide clearer guidance about how an intangible asset should be defined for tax purposes? Will he give us any further information about how he will prevent the measures from being exploited and alleged market value from being manipulated to avoid tax?

I thank the hon. Lady for her speech. She raised the interplay of the corporate interest restriction and various rules, including the 30% EBITDA rule in the Finance (No. 2) Act 2017. As I am sure she appreciates, there is a distinction between that legislation and what we want to do in the clauses before the Committee. In the case of the corporate interest restriction, we are thinking about making sure that groups of companies do not abuse the borrowing of money by moving it around the group, thereby artificially reducing their tax burden. The clauses that we are considering are about regulating inter-group transfers of intangible assets, and getting the right values imputed in the circumstances.

The hon. Lady is right to say that assessing and establishing true market value is extremely complicated. A market value rule is applied in the relevant circumstances. As to whether we shall return to the matter in future and address in legislation questions of guidance and of definition of the value of intangible assets, I am happy to ask officials to look at various no doubt deep and dark parts of the UK tax code, where such definitions and other useful information may lurk, and provide the hon. Lady with what I can.

Overall, despite the complexities of the clauses and their deeply technical nature, they are important and worthy anti-avoidance measures, which we need to add to those—more than 100 of them—that the Government have introduced since 2010, saving the taxpayer £160 billion and giving us one of the lowest tax gaps in the world, and in the history of our recording such gaps.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clause 21 ordered to stand part of the Bill.

Clause 22