I beg to move amendment No. 159, in clause 56, page 49, line 5, leave out ' a qualifying' and insert 'an'

With this it will be convenient to discuss the following: Government amendments Nos. 144 and 145.

Amendment No. 160, in clause 56, page 49, leave out lines 17 and 18.  

The clause inserts new section 561A into the Capital Allowances Act 2001 to ensure that there is no clawback of capital allowances on the transfer of assets which occurs during the formation of an SE by merger—that is, where there is not a deemed disposal of market value of the fixed assets transferred to the SE during the merger so as to cause a balancing charge or allowance. As drafted, the provision applies only to capital allowance assets that fall within the scope of the Taxation of Chargeable Gains Act 1992, whereas some assets, such as chattels, are assets in respect of which capital allowances can be claimed but are not within the scope of that Act. Furthermore, it will not apply if the formation of an SE by merger falls within the usual relief under UK tax law for reorganisations of section 139 of the 1992 Act. We see no policy reason for that.

The Government amendments essentially cover the point that I am trying to make. I merely seek a further explanation from the Minister to clarify the point.

I do not think that I need to explain the purpose of the clause. Both the Opposition and the Government amendments would extend the provision to a limited number of assets in areas that qualify for capital allowances but are outside the scope defined in the clause. To that extent I recognise clearly the constructive spirit in which the hon. Gentleman tabled the amendment. However, as I will explain briefly, both amendments have collateral consequences that are wider than I think he intended. For that reason I encourage him to consider accepting the Government amendments rather than press the formula in his amendments.

By removing the word ''qualifying'' under amendment No. 159, the scope of the clause would be widened to the extent where all assets eligible for capital allowances that are transferred as a result of a merger would be free of a capital allowances balancing charge. The relief would, in particular, be extended to assets to which the mergers directive may not apply, so it would be possible for companies to avoid a charge where one would be appropriate, for example, where the asset was no longer within the scope of UK tax after the merger. That could happen where the merged SE was in another member state and the assets transferred were no longer used for the purposes of a business in the UK.

Article 4(1) of the mergers directive provides that tax neutrality is only to apply to those assets that remain effectively connected to a permanent establishment in the transferring country. Consequently, the Government wish to restrict the scope of the clause only to those assets that remain effectively connected with a UK branch or permanent establishment.

On the other hand, although Government amendments Nos. 144 and 145 deal with the same problem of limited areas outside the scope of the original clauses, they do so in a way that does not require the removal of the terms ''qualifying assets'', thus avoiding the problem that I have outlined. I hope that the hon. Gentleman will accept them.  

I did say that as currently drafted clause 56 only applies to capital allowance assets that are in the capital gains tax rules, which would have excluded most moveable plant and machinery and would therefore have been absurd. However, amendment No. 145 deals with that.

New subsection (3) rightly remedies the provision to cover all capital allowance assets and new subsections (4) and (5) seek to ensure that the subsection applies only where the assets remain in the charge to UK tax. That is a sensible condition, albeit one that may, regrettably—or may not—be challenged in due course under EU law. However, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 144, in clause 56, page 49, line 7, after ''applies'', insert

'(or would apply but for section 140E(1)(d)).'.

No. 145, in clause 56, page 49, leave out lines 17 and 18 and insert—

'(3) For the purposes of subsection (1) an asset is a ''qualifying asset'' if—

(a) it is transferred to the SE as part of the merger forming it, and

(b) subsections (4) and (5) are satisfied in respect of it.

(4) This subsection is satisfied in respect of an asset if—

(a) the transferor is resident in the United Kingdom at the time of the transfer, or

(b) the asset is an asset of a permanent establishment in the United Kingdom of the transferor.

(5) This subsection is satisfied in respect of an asset if—

(a) the transferee SE is resident in the United Kingdom on formation, or

(b) the asset is an asset of a permanent establishment in the United Kingdom of the transferee SE on its formation.''.'.—[John Healey.]

Clause 56, as amended, ordered to stand part of the Bill.

Clauses 57 to 64 ordered to stand part of the Bill.