Clause 41 - Corporation tax: tax mismatch schemes

Finance Bill – in a Public Bill Committee am 3:30 pm ar 4 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of David Crausby David Crausby Llafur, Bolton North East

With this it will be convenient to discuss that schedule 19 be the Nineteenth schedule to the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The clause will block a scheme that used partnerships to avoid what is known as group mismatch legislation. It targets a loophole whereby companies reduce their tax liabilities through the use of loans and derivatives that create artificial losses. It worked by companies entering into loans with a partnership of which they were a member. The loan was then accounted for differently by the company and the partnership to give a tax advantage. I am sure that members of the Committee know that that is described as the asymmetric treatment of loans or derivatives. Partnerships or other collective schemes have been used repeatedly in tax avoidance schemes, and it is important that we support steps that address some of those practices. The clause targets schemes that aim to defeat the group mismatch legislation, such as allowing different members of a group of companies to bring separate amounts into account in respect of the same loan or derivative.

HMRC is dealing with several ongoing court cases, and it would not be proper to refer to them for sub judice reasons. However, it is notable that some comments have been made by HMRC representatives about the schemes making what would otherwise be taxable income vanish into thin air. That was a good way in which to  explain how such accounting treatment can create loopholes that are exploited, especially in the catering, hospitality and brewing industries. I should be grateful if the Minister can give us some rationale for why particular groups of companies in those sectors have taken to using such a provision as a way in which to minimise their tax exposure.

Will the Minister also say a word about the complexity of the Government’s chosen solution, with more provisions being jimmied into the Corporation Tax Act 2010, much of which will duplicate some of the current mismatch rules? Would it not be simpler to deal with the problem by amending the current rules so that they catch a wider set of arrangements, instead of adding eight further clauses to the existing tax code? Will the measures be needed when the general anti-abuse rule is put in place for Royal Assent? How many tax mismatch schemes are currently being examined by HMRC? What estimate can the Minister give of the number of companies or transactions that will be captured under the new law?

Finally, will the legislation cover mismatch schemes that cross borders? It is a point I have already asked about, but it is more relevant now in relation to some of the transfer pricing arrangements that have been in the media recently. Such arrangements could cut into some of these particular group mismatch arrangements. I would be grateful if the Minister could also say whether that will also form part of the broader OECD discussions about tax avoidance that we hope will take place.

Photo of David Gauke David Gauke The Exchequer Secretary

Clause 41 and schedule 19 make changes to defeat tax avoidance schemes that rely on a mismatch being created by accounting in two different ways for a transaction entered into by a company. The changes are intended to defeat avoidance schemes that involve loans or financial derivatives entered into by companies. Such schemes involve a mismatch being created by a company entering into a loan or a derivative with a partnership of which it is a member, or other similar arrangements. The company and the partnership account for the loan or derivative differently so that a mismatch arises. For example, a loss might arise in the company with no matching profit in the partnership, giving rise to a tax saving overall where there has been no real economic loss.

We do not accept that these schemes achieve the effect that is claimed, but clause 41 and schedule 19 will put the matter beyond doubt. The changes that they make will ensure that, where a tax advantage arises from any asymmetry in the way in which a company accounts for a loan or derivative, that advantage will be removed. The clause is broadly worded so that any asymmetry is caught, whatever the details of the particular structure used.

The hon. Member for Nottingham East asked why the normal tax rules did not prevent this avoidance. If a company is taxed on financial instruments based on its own accounting profits or losses, different accounting policies may be adopted in respect of the same transaction, where a company enters into a financial transaction with a partnership of which it is a member so that the same transaction is reported by the company and the partnership in different ways. That may give rise to an asymmetrical tax outcome. Transactions involving two  different companies will be caught by the group mismatch rules in the Corporation Tax Act 2010, and any tax advantage will be prevented. Clause 41 and schedule 19 will prevent any tax advantage from arising where a single company is involved.

The hon. Gentleman asked whether the legislation was too complicated. It is worth pointing out that it is based on the group mismatch anti-avoidance legislation in the 2010 Act, so it will be familiar to both companies and their advisers. He also asked whether the general anti-abuse rule would prevent this kind of avoidance. Depending on the circumstances, the GAAR may well prevent it. However, this precisely targeted measure will give companies certainty and close down avoidance schemes that rely on such a structure.

The hon. Gentleman asked how many companies liked to use or had used the scheme, and how much tax was involved. HMRC is aware of four companies using the scheme and the loss of tax is estimated at £30 million each year. There was a concern that the use of such schemes would spread quickly if we did not take action. The use of the scheme is not limited to one sector—indeed, even among that small sample, companies in a range of sectors appear to have used it.

I hope that I have provided some further information to the Committee and some clarity on the matter. I welcome the hon. Gentleman’s support for the measure, which is designed to protect revenue and deal with avoidance. It is part of the Government’s determination to deal with tax avoidance at every opportunity.

The hon. Gentleman raises a wider issue of the base erosion and profits shifting work that the OECD is undertaking, following the encouragement given to it by the Prime Minister and the Chancellor. We are actively involved in measures to ensure that the international corporate tax system is fit for purpose and adequate for the 21st century. There is, perhaps, a wider debate to be had on that, but, with regard to clause 41, I hope that I have provided sufficient clarity to the Committee so that it may stand part of the Bill.

Question put and agreed to.

Clause 41 accordingly ordered to stand part of the Bill.

Schedule 19 agreed to.