Schedule 6 - Accounting practice and related matters

Finance Bill – in a Public Bill Committee am 12:00 pm ar 28 Mehefin 2005.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 12:00, 28 Mehefin 2005

I beg to move amendment No. 114, in schedule 6, page 84, line 35, after ‘company’, insert

‘(such accounts being prepared in accordance with generally accepted accounting practice).’.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

With this it will be convenient to discuss amendment No. 115, in schedule 6, page 85, line 18, after ‘company’, insert

‘(such accounts being prepared in accordance with generally accepted accounting practice).’.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The amendments would confirm explicitly that the accounts referred to in the schedule must be prepared under United Kingdom generally accepted accounting practice. That would ensure that the schedule operates as intended and that the   operation of section 836A of the Taxes Act 1988 and section 50 of the Finance Act 2004 is imported into the paragraph. In respect of the application of accounting standards to securitisation companies, it is important that regard be had to section 83(1) of the Finance Act 2005 for the provision to work properly.

The Paymaster General wants to prevent leakage of tax from the system. I am sure that her officials are aware that people in the big, wide world who specialise in such matters are already looking at using companies when local company law requires them to use particular accounting treatments that give a result, which is convenient to them from a tax point of view. It is considered appropriate therefore for there to be an explicit reference to the accounts being prepared in accordance with generally accepted accounting procedure.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Before referring directly to the amendments, it would be helpful if I set certain matters in context as that would deal with the issues raised by the hon. Gentleman. The schedule will continue the work of adapting tax legislation to take account of the adoption by UK companies of international accounting standards and the new UK standards that follow the IAS closely, a point that will be important to bear in mind when I come to the amendments.

The schedule builds on the legislation that was included under the Finance Acts of 2005 and 2004. The IAS are developing all the time and, as companies are grappling with converting to those standards, it is not surprising that further tax issues keep emerging. To cope with the rapid change and to make sure that tax legislation keeps up with the demands of the growth economy and fast-changing competitiveness, the schedule continues the trend to include regulation-making powers to enable the Government to react quickly to changes and to consult about them outside the usual Finance Bill timetable. I have written to the Committee and have described the way in which we intend to use such powers. Reservations are always expressed about the use of regulations, but I hope that Opposition Members will accept that the use of regulations is necessary in a complex and evolving situation.

The schedule reacts also to representations about a late change made under the Finance Act 2005. The change was made to stop avoidance and to block unintended loopholes. However, some experts who are working closely with Her Majesty’s Revenue and Customs in such areas said that the change may inadvertently have gone too far. That returns to our earlier debate about how the Government try to strike a balance. Because the change may have gone too far, there was a possibility that it would inhibit some types of corporate rescue. The Government acted swiftly to relax the rule without destroying its original aim.

I mentioned the close working between HMRC and the experts. I pay tribute to those from business and the professions who engaged in the consultative groups that HMRC set up precisely to try to curb problems for both business and tax authorities in this   rapidly changing environment. In the consultation process, the groups were particularly helpful in contributing to the designing of regulations dealing with the most complex technical parts of the changes. Six regulations were laid in December last year, but they dealt with only part of the story. There has been a continuing process of refining the draft regulations, modifying and extending the December regulations, so that they can deal with a lot of new issues that are coming to light. That process is in hand and there is a very close working relationship.

Having set the scene to show how the Government have put in place a process to deal with changing circumstances, I come to amendments Nos. 114 and 115. I recognise that the intention behind the amendments is to be helpful, but I reassure the hon. Gentleman that they are unnecessary. They seek to ensure that where the legislation being amended under the schedule refers to the “carrying value” of a loan relationship in a company’s accounts, the accounts are those prepared in accordance with generally accepted accounting practice. However, it is highly unlikely that the accounts of a company would not be prepared in that way.

The hon. Gentleman touched on what might be the one exception; a company, based in another country, using that country’s accounting standards. The loan relationships legislation already provides that if a company does not draw up accounts in accordance with UK generally accepted accounting practice, for tax purposes it must be assumed that it has used the UK generally accepted accounting practice. So, the amendments are unnecessary because the Bill already copes through its interaction with loan relationships legislation; that addresses the point that the hon. Gentleman made.

Having put that clearly on the record, I hope that the hon. Gentleman accepts that on this occasion the Government are trying to work closely with business to respond to international accounting standards, the new UK standards, and the transition from one to the other.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 12:15, 28 Mehefin 2005

I am grateful to the Paymaster General. It might be considered slightly optimistic to say that the schedule builds on the Finance Act 2005. In fact it corrects the defects in that Act, which necessarily went through the House at great speed; all stages were conducted in a single afternoon. That probably underpins the point that we have tried to make; there really is need for extensive consultation with business on these matters. The Paymaster General herself spoke of the benefit that such a consultative relationship can have.

The bottom line is that although it may be sometimes tempting to think that all people who plan corporate tax schemes are simply trying to do the Treasury down, the truth of the matter is that they are anxious to keep the line between permissible planning and unacceptable avoidance clear. Provided that the Government’s intentions are not grossly unreasonable, if they make their end target clear the industry and the specialists will rally round and try to   help them to devise legislation that is as narrowly focused on the Government target as possible. After all, it is in the industry’s interests to do so.

The problem, to which the Paymaster General alluded, is that because there is an emotion that we can perhaps only describe as paranoia surrounding this whole process, there is no pre-consultation. Announcements are sometimes made immediately prior to the Budget, with Budget day as the date when they come into effect. That results in everyone running to catch up, rather than quietly discussing the issues, assessing what the Government’s real policy objective is and helping the Inland Revenue and Treasury officials to draft effective legislation.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

Is the hon. Gentleman saying that the explanatory notes to schedule 6 are wrong? They state:

“A Working Group on the tax implications of IAS 39, composed of representatives of the professions, business and HM Revenue and Customs continues to meet. It is concentrating on two areas that have caused particular difficulty: the hedging of foreign currency risk, and the treatment of convertible and asset-linked securities.”

That seems to me to refer to consultation, and therefore directly contradicts what the hon. Gentleman has just said about a lack of consultation on these sorts of matters. Is he saying that that statement in the explanatory notes is incorrect?

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

In the context of the introduction of international financial reporting standards, there will be ongoing consultation with industry. I was making a more general point about hasty legislation and the temptation not to consult, which the Paymaster General referred to in her remarks on anti-avoidance legislation. The danger of that is that things might then be got wrong and have to be unwound later.

The Paymaster General also made some important points about the broader structure of schedule 6 and the regulations that will in due course be made under paragraphs 10 and 11. I anticipate that there will be a stand part debate, and it might be sensible for me to comment on the provision in general then. For now, I will confine my remarks to the two amendments. The Paymaster General has given a clear assurance that the concern that underlay those amendments is misplaced and that there are other legislative measures that will deal with it, and I am grateful to her for that. She has satisfied me that they are unnecessary. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I beg to move amendment No. 113, in schedule 6, page 86, line 24, at end insert—

‘Spreading of adjustment on change of accounting policy 6A(1)In paragraph 19A of Schedule 9 to FA 1996 (loan relationships: adjustment on change of accounting policy), after sub-paragraph (5) insert— “(5A)Where there is a change of accounting policy in accordance with sub-paragraph (2)(a) above, then the company may in respect of its cumulative adjustments, elect that the adjustment shall be spread over six periods of account rather than being taxed in accordance with sub-paragraph (3) above. (5B)An election made in accordance with sub-paragraph (5A) must be made— (a)by notice in writing,

6A(1)In paragraph 19A of Schedule 9 to FA 1996 (loan relationships: adjustment on change of accounting policy), after sub-paragraph (5) insert—

“(5A)Where there is a change of accounting policy in accordance with sub-paragraph (2)(a) above, then the company may in respect of its cumulative adjustments, elect that the adjustment shall be spread over six periods of account rather than being taxed in accordance with sub-paragraph (3) above.

(5B)An election made in accordance with sub-paragraph (5A) must be made—

(a)by notice in writing,

(b)to the Commissioners,

(c)within twelve months of the end of the first accounting period to which the new basis applies.

(5C)If an election is made, then, in each of the six periods of account beginning with the first period for which the company prepares accounts in accordance with international accounting standards, an amount equal to one-sixth of the amount of adjustment is treated as arising and chargeable to tax.”.’.

The amendment is a pragmatic measure that deals with two issues. When other major changes have been made in the basic computation of taxable profits—for example, the change from realisation basis to market in 2002, and the introduction of the loan relationship rules in 1996—facilities were made available so that the gain or loss arising from the introduction of the legislation and the change that was therefore taking place could be spread over six years in order to ensure that taxpayers were not hit in a single period with what was effectively a windfall tax. Also, the legislation and the statutory instruments are still being laid around the whole subject of the implementation of IFRS and its impact on taxable profit calculations. As the Paymaster General said, and the hon. Member for Wolverhampton, South-West emphasised, there is an ongoing consultation process on how the detail of that would work.

It is unreasonable to expect taxpayers to have to pay any windfall tax arising from the introduction to the Revenue in a single period. One concern is that the rather generous, or reasonable, treatment that has been offered when there have been earlier structural changes to the way in which taxation is calculated appears not to be on offer this time. Perhaps we on the Conservative Benches are puzzling over the Red Book prediction that corporation tax receipts will rise by 28 per cent. next year, compared to this year. Many who are engaged in business and industry spend some time puzzling over that, too. Perhaps the Government expect that there will be a one-off windfall benefit from these changes that it is seeking to capture, which is why they have not allowed a more generous spreading treatment for the one-off change that has been allowed in the past.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

The transitional aspects are difficult, but is not it the case, to quote explanatory note 35 to schedule C:

“In 2003 the DTI announced that the UK would take up an option in the”

European Union

Regulation to permit, but not require, all UK companies to use IAS to draw up their accounts, also from 2005.”

That is permissive but not mandatory, so surely it is a matter of whether a company finds one regime more favourable than the other and is not required to switch.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I might have to take advice from my hon. Friends on that. However, the point surely remains the same. The Government are committed to moving to international financial reporting standards. Surely it is appropriate for there to be a smoothing mechanism whenever any structural change is made. If the hon. Member for Wolverhampton, South-West   does not mind, I should like to hear what the Paymaster General has to say about this; whether there is a principled argument, on this occasion, against allowing the impact of the change to be spread over a period of time, or whether it is simple expediency from a revenue-gathering point of view.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Amendment No. 113 allows a company that adopts international accounting standards to elect to spread the transitional adjustment arising on the change of the accounting basis over an indeterminate period of between five and seven years. However, that only applies if the company does not exercise an election to international accounting standards to restate its previous year’s figures using UK generally accepted accounting procedures, or to its loan relationships, not its derivative contracts. It does not apply if the company changes one version of UK generally accepted accounting procedures to another.

I thought that the hon. Gentleman might say that amendment No. 111 was a probing amendment, so I should explain why it is not acceptable. I suspect that he knows, but I shall put it on the record anyway.

The change to international accounting standards throws up the possibility of big differences between the closing figures in a balance sheet using UK standards and the opening figures using international accounting standards. If nothing were done, those amounts, whether they were profits or losses, would all be effective for tax in 2005.

The businesses affected by that, particularly banks, asked for some form of alleviation from having to bring the amounts in at once. They pointed out that the figures were very large—an estimate of an extra £4 billion of losses on one issue for banks alone—and volatile. Some companies would be big winners and some would be big losers; some might net profits and some might have losses to be unaffected. As a result, we announced in December that most transitional adjustments would be deferred to 2006 pending detailed figures being available. When they are, the Government will decide how to proceed with the transitional adjustments.

The amendment, if passed, would at a stroke, subvert the policy. There is a potential for everything to happen that we are being told about—for very large losses and large profits swinging between different companies and businesses—and for a transition to be desirable. We need the figures in order to come to a sensible arrangement.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I would like to finish the point. I will cover everything and, if necessary, the hon. Gentleman can come back in.

The amendment seeks to substitute that careful examination of the figures and their effects on companies with a lottery in which only those companies showing a net profit on their debt assets and liabilities when they first adopt the international   accounting standards can elect to spread the taxation of those profits, while those with losses on transition of their debt assets and liabilities, or those with transitional profits or losses arising in some different way, gain no greater degree of certainty. For example, adjustments on derivatives, which are not covered by the amendment, might run into hundreds of millions of pounds for some companies. That would not apply just for banks and other financial institutions, but also for oil companies, utilities and others that have derivatives embedded in purchase or supply contracts.

It has been virtually impossible for companies to predict the effect of the change on their balance sheets. Most of those companies that adopted the new standards on 1 January are still struggling to quantify the transitional profits or losses. Further regulations will be laid as soon as possible. They will set out how the transitional amounts, which have been temporarily deferred by the regulations, will be dealt with.

First, however, the Treasury and HMRC are endeavouring to obtain figures from the major companies on the size and direction of transitional adjustments in order to inform the policy. The hon. Gentleman is right to say that that is not new; where this type of situation has occurred, HMRC has a track record of negotiating with the companies to achieve a sensible transition.

I urge business to let their representative bodies have a decision as soon as possible. A decision will have to be made soon, and the more comprehensive the figures, the better the solution can be targeted to assist companies and to strike the right balance.

The amendment would allow companies to elect out of the regulations entirely, but it would be a one-way bet, because no company would elect to spread its losses under the amendment if they did not know what the revised regulations would say. The amendment covers only a narrow part of the issue. As I said, it does not deal with derivative contracts at all. It does not deal with the cases where the transitional adjustment arises as a prior period adjustment, whether under an international accounting standard or the new UK generally accepted accounting practice.

There are other drafting issues. The term “cumulative adjustments” is undefined and the spread proposed is over six periods of account—not six years, which is what I suspect was meant. Six periods of account could be longer than six years, especially if companies manipulated their periods to stretch out the transition. Furthermore, the language at the end of proposed new sub-paragraph (5C) is not suitable for the loan relationships legislation and makes little sense.

The amendment does not work; even if it did, it would not do so in an even-handed way on the differences in the accounts. The essential point is that when HMRC, having consulted with the representative bodies and the companies, is aware of the scale of the issue, discussion can take place about whether transitional arrangements are necessary—I tend to think that they will be—and about the time periods and the relevant arrangements.

That is a much better way to proceed. I hope that, given my assurances that that discussion will take place and that those arrangements will be made in a proper, balanced fashion with the information before us, the hon. Gentleman will not seek to press his amendment.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The best reassurance that the Paymaster General has given me is that she thinks that transitional arrangements “probably will be necessary”—I think that that was her phrase. Hopefully, that will give some comfort.

We are in a slightly strange situation. In the next three weeks, companies that adopted IFRS from 1 January make their first payments of tax under the IFRS standards. There is still the question of how the transitional sums will be dealt with. My understanding is that business would like to get this matter resolved.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I do not know where the hon. Gentleman gets his information, but the position of HMRC has been confirmed to me again. HMRC understands the point about transitional arrangements, is trying to meet companies on that and wants companies to tell it the scale of the problem. Then it will open up the discussion so that that can be properly decided on. That has been said repeatedly to companies. In the absence of the information from the companies, it is difficult to make the arrangements. For the companies to complain that it has not been done because they have not provided the information is simply not reasonable.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I am not sure whether I quite understood the Paymaster General’s point. I was trying to make the point that—if I understood her correctly—by changing their accounting standards, those transitional amounts will arise. Obviously, the companies themselves will not know what the tax treatment of those amounts will be. The Paymaster General is urging those companies to engage in discussions with the Revenue to present their arguments, I guess, for the most favourable transitional arrangements. That, I think, is what she is suggesting. I do not have any evidence, but perhaps I can infer from what she says that companies are not engaging in that process. I thought that she said earlier that they were, and that the consultation process was going well.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I shall, although the Paymaster General does not always offer me the same courtesy.

Hon. Members:


Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

The heat has not even risen yet; and the hon. Gentleman complained about barbed comments in our last sitting.

Photo of Nicholas Winterton Nicholas Winterton Ceidwadwyr, Macclesfield

Order. This has been a measured and constructive debate, and I hope that it can continue that way.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

Discussion is going on with business. Business has been informed by HMRC that to progress the discussion on transitional arrangements the figures are required. HMRC is awaiting those figures. The hon. Gentleman said that businesses had wanted him to press the Minister in Committee to get the matter settled now. I was saying that the essential ingredient needed to finalise the matter was the information, which should be forthcoming from business. We are awaiting that information so that we can engage in a discussion on transition.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I do not think that we disagree on anything. I said—and I have not heard the Paymaster General disagree with the view—that I was sure that business would rather have the issue clarified sooner than later. She said that to get it clarified sooner we would need the information. I then said that I was not aware that there was a problem with the flow of information, because she had previously told the Committee that the consultation process was ongoing and working well. However, I infer from what she says that we are at a point now—let us call it a point—where that consultation is not stalled, perhaps, but is awaiting input from the companies concerned before the Treasury or the Revenue can make suggestions for a transitional regime.

Under the amendment, we have put down one option for a transitional regime. We have not sought to suggest that it is a perfect solution. The Paymaster General thought that I might have moved it as a probing amendment, whatever that means, but we did not draft it thinking that it was perfect in every respect and covered every aspect. But I guess I am somewhat reassured by the Minister saying that there will be a transitional regime. I hope that it will allow the spreading of any tax consequences over a longish period, as past changes have done, because companies that made the change without knowing what the tax treatment of the transitional amounts would be have taken a leap of faith. They have taken a leap in the dark, although in some cases they have not had a great deal of choice about it. They are dependent on the Treasury and the Revenue concluding on a sensible regime.

I guess—I do not know—that there is a contingent tax liability that such companies have to carry until the matter is clarified and the details of regulations for the transitional period are made available. I hope that the tax treatment will then become clear and that it will be spread in a way that does not create shocks for companies in the market; and I hope that it will not produce post-tax situations that are substantially worse than expected for any company or significant group of companies.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

May I caution the hon. Gentleman? The Paymaster General said that negotiations were going on. To use a timely analogy, the tennis ball is in the companies’ court, from what she has said. Is the hon. Gentleman not worried that, if amendment No. 113 were passed, the companies—his friends in the   City—could get a worse deal than the one that they might end up negotiating with the Treasury? The amendment might not do them any favours at all.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 12:45, 28 Mehefin 2005

I hope that the people we are talking about are friends of us all; they create the wealth on which our public services and the prosperity of our people depend. It is not usually his style, but if the hon. Gentleman wants to play class warfare and try to provoke me into talking about his friends in the trade unions for whom he used to work and from whom, in his previous firm, he derived the large fees that he told the Committee about last week, I have to say that that is not a helpful way in which to proceed.

We are talking about some of the largest companies in the UK economy, the health of which is important to all of us. They, in turn, pay dividends after tax, which support all sorts of enterprises, such as private investors and collective investment funds. It must be important to us all that the system is treated properly and I am sure that the Paymaster General fully intends to ensure that that is the case. Despite our slightly ill-tempered exchange, I perceive no point of difference between us except that we want to define in advance how the transitional amounts will be handled, whereas she prefers to engage in a consultation process, which apparently has now been held up because information is awaited from the corporate side, but which will determine later how the amounts are to be dealt with. The hon. Member for Wolverhampton, South-West reinforced the Paymaster General’s argument that, as drafted, the amendment would not deal effectively with the loan relationships and the gains on derivatives, but I do not think that the right hon. Lady and I are millions of miles away from each other.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

The hon. Gentleman suggested that I am not a friend of business. I was not raising the issue from one angle or the other. I merely pointed out a way that could be business friendly. To use the vernacular, the deal that the hon. Gentleman wants to put on the table with amendment No. 113 might be a worse option for business than the deal that might be available from the Treasury, which is currently under discussion.

Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Or not currently under discussion, given what the Paymaster General said. The hon. Gentleman might be right in that the right hon. Lady has pointed out the defect in the amendment. I accept that.

One of the themes to which we have returned continually during our debates is that the markets values certainty highly. As long as the transitional treatment is unclear, some element of uncertainty will be created and it will be helpful to remove that as soon as possible. I am sure that the Paymaster General is right to say that the ball is in business’s court. It was not clear that those to whom I have spoken regard themselves as holding the ball and holding up the process until they pass information back to the Revenue, but I shall take what the right hon. Lady said at face value. If people consider that there is an issue   to be raised in response to her point, I am sure that it will come up in due course and we can return to the matter. For the moment, having aired the issues and heard the Paymaster General’s response, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Sixth schedule to the Bill.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

I wonder whether the Paymaster General could, either now or by letter, explain paragraph 25 of the explanatory notes on schedule 6, which states:

“a company in a period of account beginning on or after 1 January 2005 is not permitted to adopt bifurcation treatment in its accounts for loan relationship assets containing embedded derivates (“relevant assets”) because it still uses “old UK GAAP”, it can elect for section 94A(1) to apply.”

That is supposed to be an explanatory note, but I struggle with it, so I ask for clarification. .

Photo of Mark Francois Mark Francois Shadow Paymaster General

May I tell the hon. Gentleman that it is disconcerting for the whole Committee to hear his admission that he does not understand a key paragraph of the explanatory notes? Several of us thought that he wrote them. I am extremely alarmed and I wish to place that on the record before the Paymaster General replies to that unexpected inquiry.

Photo of Rob Marris Rob Marris Llafur, Wolverhampton South West

Had I written the explanatory notes, I would have been moonlighting—and I do not approve of that—and I would have understood them completely. I mentioned one note, which I think is relatively minor, that I did not understand and I was hoping for an explanation. Apart from that one, the explanatory notes have been extremely helpful.

Photo of Stephen Hammond Stephen Hammond Ceidwadwyr, Wimbledon

I wish to raise a point that was highlighted by the Chartered Institute of Taxation. I am sure that the Paymaster General is aware of it, but I hope that today she will give the Committee clarity on it. It deals with a problem that has arisen in relation to paragraph 5 of schedule 6, which deals with schedule 9 of the Finance Act 1996, where, in accordance with either international accounting standard 39 or financial reporting standard 26, a company uses a derivative contract as a fair value hedge of a loan that it has made.

A fair value hedge will arise where the company has lent money on fixed-rate terms and then entered into an interest rate swap to change the fixed-rate return on the loan for a floating-rate return. It seems to me, and to the Chartered Institute of Taxation, that the schedule, as drafted, would prevent companies from being able to use a derivative contract as a fair value hedge of a creditor loan. That is because when they account for it on an amortised cost basis or an accruals basis—I think that amortised cost is the new version of the accruals basis—they will be denied relief for any fall in the value of that loan.

Will the Paymaster General clarify that where a lender uses a derivative contract to hedge a fixed-rate loan, and the contract and loan are together designated as a fair value hedge for accounting purposes under either IAS 39 or FRS 26, the company will not be prevented from obtaining relief for debits arising on the loan relationship as a result of the revaluations attributable to the hedging relationship?

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

In commenting on the schedule, specifically on the Government’s intention to bring forward regulations to establish a permanent tax regime for securitisation specific purpose vehicles, I wish to reiterate a number of points.

First and foremost, all of us accept the need to balance casting the net of anti-avoidance legislation wide enough to prevent circumvention and maintaining a tax regime that does not prevent foreign investment, which would damage UK competitiveness. Secondly, we must be careful of unintended consequences, which is a theme that we have discussed throughout this Committee. We must avoid damaging jobs in the financial services and manufacturing sectors and ultimately losing the tax benefits that would accrue to the Exchequer. My third point is about the level of uncertainty, which was addressed by my hon. Friend the Member for Runnymede and Weybridge. The lack of clarity in the wording of the Bill, and specifically in the schedule, still risks putting off foreign investment in the UK and driving businesses into more favourable tax regimes.

None the less, I welcome the efforts the Government have made in respect of the schedule—specifically the fact that the Inland Revenue has listened to the securitisation industry and introduced appropriate changes to UK GAAP moratoriums for those companies with that profile. I also welcome that the Government intend to introduce regulations to establish a permanent tax regime for the securitisation SPVs. However, in a similar vein to my earlier argument with respect to real estate investment trusts, I urge the Government to accelerate the decision-making process to ensure certainty, not only because these vehicles will often be used for long-term borrowings, but because, as the Paymaster General said, we want to create in Britain a modern and competitive tax regime.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

I look forward with some enthusiasm to our discussions on clause 59 and schedule 7, because at that point I will be able to demonstrate how difficult it is for a Government to strike a balance on the anti-avoidance of tax by ensuring that measures are appropriately targeted and err on the side of the taxpayer, and I will also be able to describe the problems that can subsequently arise. I hope that when the arguments come back the other way, the hon. Gentlemen will not object because they will be able to see clearly what is going on. They will be able to reflect on whether all the comments they made today still hold true because of the behaviours of others, notwithstanding the good intentions underlying the speeches made in this Committee.

The hon. Member for Braintree has again made a point that is, rightly, repeatedly returned to in these debates: the importance of dealing with avoidance. I have to say to the hon. Gentleman, however, that certainty is not a one-way street. It is not just business that needs certainty from the tax system. Certainty is needed for taxpayers and for the Exchequer—the tax authorities should be able to make reasonable assumptions. That is the balance that we are seeking to strike.

It has not always been the view of Conservative Members of Finance Bill Committees—I will be able to provide illustrations of this point later—that   aggressive avoidance where there is no question of commercial purposes should be dealt with. I mistakenly assumed that that previously expressed point of view would continue. I accept the statement made by the hon. Member for Runnymede and Weybridge that he is not seeking to defend avoidance. However, I say to the hon. Member for Braintree that avoidance works against fair tax competition if it distorts investment decisions. He knows that full well from his own experience.

It being One o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o’clock.