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

As with clause 26, which we dealt with before the recess, clause 30 was introduced as a result of a decision by an EU institution. In this case, it is the Court of Justice of the European Union rather than the Commission—I hope that the very mention of those organisations does not induce swivel-eyed behaviour from Government Members. Deriving from the September 2012 Court of Justice decision in the case of Philips Electronics UK Ltd, and first announced on 11 December 2012, the measures in the clause amend the restrictions on when companies resident in the European economic area can surrender losses attributable to their UK permanent establishments as group relief from corporation tax in this country.

Under section 107 of the Corporation Tax Act 2010, companies resident in the European economic area have been subject to the same rules as non-European economic area resident companies, which meant that group relief was denied to those companies where losses were potentially deductible overseas, even if no overseas deduction had been claimed, in order to prevent the double use of losses. The Court of Justice judgment in Philips Electronics UK Ltd ruled that section 403D of the Income and Corporation Taxes Act 1988—the precursor to section 107 of the Corporation Tax Act 2010—was a restriction on the freedom of establishment that could not be justified by overriding reasons in the public interest, and was therefore unlawful and must be disapplied.

With the Government’s attempt to make the UK compliant with EU law, and under the provisions of clause 30, with effect from 1 April 2013, there are now fewer restrictions on when EEA-resident companies can surrender losses from their UK permanent establishments as group relief in the UK. The new restrictions are based on the actual use of losses, or part thereof, in any country in any period, rather than on their potential future use in another country. Only the amount that is actually used is barred from group relief.

According to the tax information and impact note and the updated technical note, the measure will have no impact on the Exchequer. However, as with most things related to Europe and this Government, a number of very serious concerns have been raised. The fairly damning conclusion of the Chartered Institute of Taxation on the Government’s proposed remedy to the Court of Justice judgment reads as follows:

“The unlawfulness of section 403D (and consequently section 107) relate to the UK’s denying group relief where there is any prospect of any part of the loss of a UK permanent establishment of a non-UK resident EEA company being used by the non-UK resident company in the country of residence of that company.

The proposed changes to section 107 for UK PEs of a company resident in a country in the EEA are to limit that denial of group relief to where the UK permanent establishment’s loss, or some part thereof, is actually used in another EU country, and then only the amount that is used is barred from group relief.

In Philips, the UK Government’s justification with regard to the allocation of taxing powers…was rejected by the Court of Justice: the Court of Justice pointed out that the UK Government remained just as able to tax the UK permanent establishment if its losses were wholly or partly used in another country as if they were not. The Court held that the UK as the source country has the primary obligation to give loss relief and that a similar bar does not apply to losses of UK subsidiary companies.

The proposed changes to section 107 merely narrow the circumstances in which group relief is denied. However, since the Court of Justice rejected the UK Government’s public policy justification for any denial of group relief, these changes do not address the findings of the Court of Justice, whose conclusion was that the section should not apply at all.

Accordingly, in our view, section 107 will remain unlawful as a matter of EU law even as amended by the proposed changes to be included in Finance Bill 2013.”

The Institute of Chartered Accountants in England and Wales shares that worrying conclusion:

“We are concerned that the proposed changes are not sufficient to fully implement this decision.”

It points out that before the change,

“group relief [was] not available if losses [were] potentially deductible overseas, even if no overseas deduction [was] claimed. The proposed amendment removes this restriction for UK permanent establishments of EEA companies, and replaces it with a different condition which effectively requires that the loss is not deducted for foreign tax purposes in any period.

The change means that the provision should operate more proportionately (so that relief is only restricted to the extent that a loss is actually deducted overseas), but we do not consider that this goes far enough to address the Court of Justice decision in Philips Electronics. The issue of proportionality only arises in circumstances where a measure which restricts a fundamental freedom can be justified; in which case the measure must none the less be proportionate.

However, in the Philips Electronics case the Court of Justice concluded that section 403D(1)(c) of the Income and Corporation Taxes Act of 1988 (now rewritten to section 107(5) and (6) of the Corporation Tax Act 2010) is a restriction on the freedom of establishment which cannot be justified by overriding reasons in the public interest, and that the provision should be disapplied.

We therefore consider that it would be more appropriate to remove Condition C for UK PEs of EEA companies, without imposing any further conditions for those companies.”

So, as with clause 26, we once again find ourselves discussing the Government’s attempts to make legislation EU-compliant, attempts that the leading bodies for tax professionals believe are not up to the mark. Indeed, only last month, in an even more damning assessment of the Government’s approach in this area, the new president of the Chartered Institute of Taxation stated in his inaugural speech:

“Too often the UK Government acts too late or does too little, and fails in its responsibilities. Take the Finance Bill currently going through Parliament. It contains five provisions specifically  intended to ensure that UK law complies with EU law. In the view of the experts on the Institute’s EU and human rights sub-committee at least four of them will not achieve this objective. This is crazy. This slapdash approach to complying with rules that we help set, and which help ensure that the single market can operate fairly, is failing UK taxpayers. It needs to change.”

Those are strong words. I would therefore be grateful if the Minister could address the fairly fundamental concerns expressed by both the Chartered Institute of Taxation and the ICAEW. Given the issues just outlined, how confident is he that the clause is compliant with EU law? Will we find ourselves discussing this issue again in a future Finance Bill? Why have the Government chosen to respond to the European Court of Justice judgment in that way, rather than in the way proposed by some of the tax professionals I have cited? Could he also respond to the comments from the incoming president of the Chartered Institute of Taxation, particularly the concern that the Government are acting too late, doing too little, failing in their responsibilities, operating with a crazy, slapdash approach and failing UK taxpayers?

As we have heard, the clause makes changes to ensure that the UK group relief rules for non-resident companies with loss-making UK branches are compatible with EU law. The current rules prevent non-resident companies with UK branches setting their UK branch losses against other UK profits if they could potentially be relieved against non-UK profits, even where they were not in fact relieved against non-UK profits. The Court of Justice of the European Union ruled in the Philips case that preventing group relief for UK branch losses because they could potentially be relieved against non-UK profits was not compatible with EU law.

The changes made by the clause will restrict group relief for UK branch losses of companies resident in the European economic area only where the losses are actually relieved against non-UK profits. UK branch losses that are relieved against non-UK profits will reduce the amount that the EEA resident company can surrender as group relief in the UK. If the UK branch losses are relieved against non-UK profits after the losses have been surrendered in the UK, the amount available for surrender is still reduced. Existing legislation requires the surrendering company to withdraw any previous surrenders it made to the extent that they exceed the new lower amount available for surrender.

The clause was published for technical consultation on 11 December 2012. Respondents to that consultation wanted all restrictions to be removed for EEA resident companies. However, if we were to adopt that approach, which is the approach advocated by the Chartered Institute of Taxation, UK branch losses could be surrendered for relief against UK profits elsewhere in the group, even if they had also been relieved against non-UK profits. That would provide tax planning opportunities for multinational enterprises to obtain relief twice for the same losses. The Government have not therefore adopted this suggestion.

The clause will mean that the group relief rules will be compatible with EU law without providing tax planning opportunities for multinational enterprises. The Government believe that the amendment is consistent with the judgment in the Philips case, which necessitated the change, but equally, in complying with the Philips  judgment, we do not want to provide an opportunity whereby the same loss could be used for more than one set of circumstances. I hope that satisfies the Committee.

Question put and agreed to.

Clause 30 accordingly ordered to stand part of the Bill.