Clause 32 - Change in company ownership: company reconstructions

Finance Bill – in a Public Bill Committee am 9:30 am ar 4 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

We now return to the issue covered in clause 29. Clause 32 is being introduced as one of the three clauses in chapter 3 to close down loopholes in the loss relief rules. Like clause 29, this measure was announced at Budget 2013 and took effect on Budget day, 20 March.

Clause 32 relates to the treatment of losses in the event of a company reorganisation, resulting in a change of ownership, with a change of ownership defined by the Corporation Tax Act 2010 as where 51% of the company’s shares change hands. As the technical note explains:

“Where a trade is transferred between companies under common ownership, the normal rules—that company losses should belong to the company and trade that incurred them—are suspended and any losses brought forward are allowed to transfer with the trade. However, different rules apply where trade is transferred between unconnected companies.”

Intended to counter the practice of loss buying, chapter 2 of part 14 of the Corporation Tax Act 2010

“sets out that, in such circumstances, restrictions”— on the use of losses—

“apply if there is a major change in the nature”— or conduct—

“of the trade, investment business or UK property business carried on by a company within three years of the change of ownership”,


“where the change in ownership occurs after the company’s activities in a trade become small or negligible and before any significant revival”.

I am sure that the Minister will outline some of the more technical aspects of the clause in a little more detail, but I want to draw the Committee’s attention to the technical note that relates to clauses 29, 32 and 33, which states that,

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

The tax information and impact note indicates that closing this loophole, alongside the loopholes dealt with in clauses 29 and 33, will result in an additional yield to the Exchequer of £35 million in this financial year and £40 million in 2014-15, before decreasing to £25 million a year by 2016-17.

I reiterate that that additional yield to the Exchequer and the closure of any loopholes is extremely welcome, but I would be grateful if the Minister would confirm how many companies have been using the loophole identified in the clause, and over what time period. In responding to clause 29, he mentioned that HMRC had acted swiftly to close down that loophole, but he did not state when it was first identified. Will he clarify that and quantify how much may have been lost to the Exchequer? I appreciate that, in relation to clause 29, he explained some of the difficulties associated with giving an exact figure, but will he give a figure, in relation to this clause, of what is thought to have been lost to the Exchequer both before and since the loophole was spotted, and will he tell us whether HMRC has assessed any pattern in the types of companies or sectors who may have used the loophole, or to whom it was marketed?

Photo of David Gauke David Gauke The Exchequer Secretary 9:45, 4 Mehefin 2013

Clause 32, as we have heard, is part of a group of clauses, which addresses, in broad terms, the way in which corporation tax loss relief can be used in a manner that is not consistent with Parliament’s intentions, and the principles behind loss relief. I will not run through the full background again as I did with clause 29, but I will set out a little detail about clause 32, which relates to one of those loopholes.

Loss relief legislation, in part 14 of the Corporation Tax Act 2010, contains rules to counter profitable companies buying losses from unconnected companies. Broadly, the rules apply to restrict relief if there is a change of ownership of a company and, within three years of that change, the trade or business that it carries on undergoes a major change.

Part 22 of the Act contains rules to enable transfers of trades within any group to occur without restricting or removing the ability to relieve losses. However, an anomaly in the way in which these two parts interact means that the loss-buying rules can be sidestepped if transactions are undertaken in a set order: if an intra-group transfer of a trade took place before the change in ownership of a company, the loss-buying rules applied, but if the trade occurred after the change in ownership, they did not. That has allowed, in certain circumstances, an acquiring group to access relief for losses that it should not otherwise have had.

The clause moves to address that loophole by inserting a new section 676 into part 14 of the Act, which will restrict relief for losses whether the intra-group transfer of the trade occurs before or after the company’s change of ownership. It will prevent the acquiring group from structuring the acquisition of the loss-making company so as to access relief for losses it should not otherwise have. New section 676 will have effect in relation to any change of ownership of a company that occurs on or after 20 March 2013, the date on which the change was announced in the Budget.

I was asked how many companies are likely to be affected by the proposals. I cannot answer that precisely, because it depends on companies’ future tax planning choices. I do not have to hand the exact total of recent cases of which HMRC has become aware, but it has seen an increasing number of such cases recently, which is why the Government have taken action to close the loopholes. No figures have yet been collated on how much revenue has been lost to the Exchequer, but the potential problems have been documented by way of companies undertaking reconstructions. Unfortunately, I cannot give precise answers to the hon. Lady’s questions, but there is support across the Committee for ensuring that loss-relief rules more closely reflect their underlying principles and, in so doing, provide a valuable protection to the Exchequer.

Question put and agreed to.

Clause 32 accordingly ordered to stand part of the Bill.