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

Good morning, Mr Crausby, it is a pleasure to be here again under your chairmanship.

Clause 29 is one of the three clauses in chapter 3 that seek to close loopholes in the loss relief rules. I am sure that Committee members will have read the technical note to the clause, which explains:

“The UK’s loss relief system provides a measure of parity between taxing profits and relieving losses over the life cycle of a business, ensuring that businesses with different patterns of profit and loss pay a broadly similar amount of tax. Relief is based on the following underlying principles: Brought forward trade losses should only be relievable against future profits from the same trade, carried on by the same legal entity; Tax losses should not be transferable against profits of unconnected parties; The movement of losses between companies should only be allowed where they are under common economic ownership for the accounting period when the losses arise.”

In line with those principles, companies can therefore offset losses against profits to gain relief in a number of ways, with specific loss relief and reorganisation rules to prevent companies passing the benefit of a loss to a third party. In the words of the technical note however,

“HMRC have seen a marked increase in companies entering into arrangements to circumvent these rules.”

The Chancellor consequently announced at Budget 2013 that three specific loopholes identified in the loss relief rules would be addressed through this year’s Finance Bill and should take effect from Budget day—20 March.

The group relief rules seek to ensure that a loss is first relieved against other profits of the company in which it arose before it is available for surrender, by way of group relief, to other companies in the group. Various categories of losses, expenses and deficits can be surrendered under the group rules. Controlled foreign company apportioned profits are taxed through the UK company at an amount equivalent to corporation tax, so no amount in respect of the CFC-apportioned profits is currently included within the calculation of gross profits, and they therefore do not impact on the restriction outlined in the Corporation Tax Act 2010. That brings us to Clause 29, which amends section 105 of the CTA 2010, so that chargeable profits of a CFC that are apportioned to a surrendering company will be included  as gross profits, and will therefore be included in the threshold, which amounts—listed in four categories under which they can be claimed—must exceed before group relief is available.

I outline the basic details, because there are a few issues that I would be grateful if the Minister clarified. The tax information and impact note indicates that closing the loophole, alongside the loopholes dealt with in clauses 32 and 33, will result in an additional yield to the Exchequer of £35 million in this financial year, rising to £40 million in 2014-15, before decreasing to £25 million in 2016-17. Additional revenue as a result of closing a loophole is of course extremely welcome, but could the hon. Gentleman shed some light on the meaning of the phrase

“a marked increase in companies” exploiting the loopholes, specifically the loophole dealt with by Clause 29? How many companies? Over what period of time? How was the loophole first identified? Was it identified by HMRC? How much is thought to have been lost to the Exchequer, both before and after the loophole was spotted? Can the Minister explain the variation in the annual yield expected from closing the loopholes? Perhaps awareness of the loophole explains the decrease to £25 million by 2016-17, but I would like to hear the analysis of the yield. Has HMRC assessed any pattern in the types of companies concerned? Does the Minister know whether this particular loophole has been marketed in any way to particular types of company?

Thank you, Mr Crausby. It is a great pleasure to serve under your chairmanship once again. I am sure all hon. Members are delighted to be back in Committee. I particularly welcome the Labour Members who have joined us. For some time I feared that the balance of the Committee was inadequate, so I am pleased to see them join us.

Clause 29 is part of a package of measures, along with clauses 32 and 33 and schedule 13, that amend corporation tax loss relief rules to close three loopholes that have allowed companies to gain greater or quicker relief for losses than was the intention of Parliament. I am grateful to the hon. Member for Newcastle upon Tyne North for setting out some background to the clause. None the less, it might be helpful to the Committee if I say a little more.

The UK’s loss relief system provides a measure of parity between taxing profits and relieving losses over the life cycle of a business, ensuring that businesses with different patterns of profit and loss pay a broadly similar amount of tax. Loss relief, since the inception of corporation tax in 1965, has been based on the following underlying principles: brought-forward trade losses should be relievable only against future profits from the same trade, carried on by the same legal entity; tax losses should not be transferable against profits of unconnected parties; and the movement of losses between companies should be allowed only where they are under common economic ownership for the accounting period when the losses arise. Within those principles, companies can gain relief for losses through set-off against profits in a number of ways, and there are specific loss relief and business reorganisation rules to prevent companies from passing the benefit of a loss to a third party.

However, HMRC has seen a marked increase in companies entering into arrangements to circumvent the rules. Three specific loopholes, which have been exploited to sidestep the rules, have been identified. Two loopholes allow companies to avoid the consequences of rules designed to prevent profitable companies from buying other companies to access relief for those other companies’ losses. Those loopholes are addressed by clauses 32 and 33 and schedule 13. The third loophole is the subject of clause 29. It allows companies to convert gross profits into apportioned profits from a controlled foreign company. This enables the company to secure a greater amount of group relief than should otherwise be available.

The current rules allow certain expenses and losses to be surrendered for group relief only to the extent that they exceed the gross profits of the surrendering company. The loophole exploits the fact that prior to this change, CFC profits apportioned back to a UK company are not included within its gross profits. Such companies are therefore free to surrender expenses and losses, certain of their own in-year losses, to others in their group without, as the underlying principles of loss relief intend them to do, first setting them against their own gross profits, including amounts apportioned by CFC rules.

The Government are addressing all the identified loopholes through amendments to strengthen the current UK loss rules in line with the underlying policy principles. Clause 29 amends the group relief rules in part 5 of the Corporation Tax Act 2010 to ensure that chargeable profits of a CFC apportioned to a company are included with gross profits in the threshold, which must be exceeded before certain losses can be surrendered. To ensure that the Exchequer is protected from any further exploitation of that loophole, the change will have effect in relation to any chargeable profits of a CFC falling on or after 20 March 2013, the date of its announcement at the previous Budget.

The hon. Member for Newcastle upon Tyne North asked how many companies are likely to be affected by the clause. It is not, in truth, possible to answer that question, because the number of companies affected will depend upon the future tax planning choices of companies. However, it would be fair to say that HMRC is aware of the scheme that the clause closes being used in the past 12 months.

The annual variation in yield is based on the fact that the Office for Budget Responsibility growth predictions, and other factors such as behavioural changes in response to anti-avoidance legislation, are factored into the calculation. As for how the scheme was first identified, four cases have been identified by HMRC so far. It would be fair to say that none of those uses of the scheme has been marketed as such; there has been no particular pattern in the use of the scheme and no particular sector has been represented. It is not possible to say how much has been lost to the Exchequer already, but we have moved swiftly to close the loophole.

There is, I suppose, a broader question about why we are moving now on some of the avoidance behaviour related to loss relief. Since the economic downturn of 2007-08 and onwards, there has been a sizeable increase in corporation tax losses, which has increased the potential for loss relating to loopholes that relate to corporation  tax losses. The Government want to ensure that companies pay their fair share, which is why we have taken action in the Bill to address those loopholes.

I am sure that all hon. Members agree that in making the UK corporation tax system as competitive and business friendly as possible it is vital to ensure that it is fair, and that rules and principles cannot be sidestepped. The clause brings loss relief rules more closely into line with their underlying principles and in doing so provides valuable protection to the Exchequer.

Question put and agreed to.

Clause 29 accordingly ordered to stand part of the Bill.