The provisions in clause 30 and schedule 6 are largely uncontroversial, as are a number of the matters that we will look at this afternoon. The two exceptions to that are highlighted in amendments Nos. 67 and 66. They would make changes to the definitions in proposed new section 343A of the Income and Corporation Taxes Act 1988, which concerns company reconstructions involving a business leasing plant or machinery.

Amendment No. 66 relates to the definition of the concept of the “principal company” contained in proposed new section 343A. The measure is designed to prevent companies from undermining the provisions in schedule 10 to the Finance Act 2006. Hon. Members may recall the debate on that—it dealt with avoidance involving the sale of leasing businesses. The schedule aims to counter a scheme that sought to use the tax-neutral transfer provisions in section 343(2) of the 1988 Act. Those provisions were intended to cover transfers within a group and to counter the schemes that sought to use them for transfers out of a group.

The proposed new section will prevent thesection 343(2) tax-neutral transfer from applying in certain situations in which a company reconstruction involves the leasing of plant or machinery, which is to say the transfer of leased assets between companies. Schedule 6 will essentially disapply the carry-over of capital allowances under 343(2) from one company to another unless certain conditions are met—the companies are called the “predecessor” and the “successor” respectively in the Bill. One of the conditions is set out in proposed new section 343A(2)(a), which provides that the principal company and the predecessor immediately before the transfer must be the same as the principal company of the successor immediately after the transfer.

That is not controversial, and does not cause problems that I am aware of in which one subsidiary transfers its leasing business to another subsidiary of the same parent. However, the section does not seem to work effectively where a subsidiary transfers its leasing business to its parent, as defined in paragraphs 11 and 12 in schedule 10 to the 2006 Act. That is because the provisions of the schedule that we are considering do not provide for any company to be its own principal company.

The best way to look at the issue is by an example. Adopting the terminology used in schedule 10 to the 2006 Act, where company B is the principal of company A, because A is B’s qualifying 75 per cent. subsidiary, if A hives up its leasing business to B, the condition contained in paragraph (a) of the new section 343A(2) is not met, because company B has no principal because it is itself the principal. The same problem would occur if a parent company hived down its leasing business to its own subsidiary. Horizontal transfers within the group are fine, and can use the tax-neutral provision in proposed section 343A(2), but vertical ones are not, and cannot use that tax-free transfer provision.

It seems to me that the legislation goes beyond the intent of preventing the transfer of a leasing portfolio out of the group, while still managing to use the tax-free transfer provisions in section 343A(2). That is the mischief that it is designed to address, but it goes beyond that. As well as targeting transfers out of the group, it also seems to prevent upstream or downstream transfers within a group from being tax-neutral. Thus, under the guise of preventing avoidance, the current drafting prevents a tax-neutral reorganisation within a group, even where there is no change in the ultimate beneficial ownership, when no tax advantage is being sought, and no economic profits being made.

There seems to be no rational reason that I can see to disapply the carry-over contained in proposed section 343A(2) in the vertical transfer situations, if the Government are prepared to apply it in the horizontal transfer situations. There may possibly have been a drafting error, which amendment No. 66 would correct, by amending the definition of “principal company” to provide that where the predecessor or successor has no principal company at the time of the transaction, it is deemed to be its own principal company. That minor change would ensure that hiving up a leasing business to a parent, or down to a subsidiary will be treated in the same way as transfers between subsidiaries in a group.

If the Chief Secretary is not happy to accept the amendment, perhaps he could explain why these two different types of transactions should be treated differently. It is a particularly important issue at present, because changes to the capital allowances regime in respect of leased assets have removed the requirement for lessor groups to have a number of subsidiaries with accounting periods spread throughout the year. As a result, many leasing groups are currently in the proves of rationalising their corporate structures to hide their leasing trades into two or three companies, having had a significant number before.

Some of those restructurings have already taken place, and some are under way at present, or took place between the effective date of the legislation, and the publication of the detailed rules. I am told that considerable disruption could be caused by the arbitrary distinction that the legislation seems to draw between vertical and horizontal transfers within the group. I would be grateful if the Chief Secretary could address that point.

Amendment No. 67 seeks to amend the definition of market value contained in subsection (5) of proposed new section 343A. It does not quite have the urgency  and significance of the previous amendment, but it is important to give the Committee the opportunity to test the reasons behind the choice of definition contained in subsection (5) of the proposed new section 343A.

The relevance of the definition is contained insubsection (4), which provides that, where a carry-over in section 343A(2) is disapplied, the leasing business shall be treated as having been sold by the predecessor company to the successor for an amount equal to its market value on the day of the transfer. The definition of “market value” that is contained in subsection (5) of proposed new section 343A refers to paragraph 41(8) of schedule 10 to the Finance Act 2006, which is similar but not identical to the definition in section 70YI of the Capital Allowances Act 2001. Both are predicated on the idea of a notional disposal of the assets in the leasing portfolio by the absolute owner, free of any leases or encumbrances. So the focus is on the hypothetical market value of the underlying asset. However, realistically, that value could be difficult to determine.

Arguably, when one is considering leased assets, it is artificial to focus on the theoretical underlying value of the base assets, free of leasehold interest. The property in question here is the leased interest, not the absolute interest free of encumbrances. Arguably, the more appropriate definition of “market value” is contained in section 577 of the 2001 Act, which focuses on the price that the book of leased assets would fetch on the open market. Thus, amendment No. 67 would remove the reference to section 41(8) of the 2006 Act and replace it with a reference to section 577 of the 2001 Act, which would value the portfolio being transferred at its actual worth, rather than at a hypothetical base asset value. To deem assets to have different values for tax purposes than their actual value always risks creating anomalies and unfairness. I would be interested to hear the Chief Secretary’s rationale for choosing the definition from section 41(8) of the 2006 Act rather than the one from section 577(1) of the 2001 Act.

I close by emphasising that the leasing industry is a significant industry for the UK economy, therefore it is vital that we get this issue right and, in respect of these two amendments, if we do not, it could cause some disruption to the restructuring that is already under way.