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

We now turn to clause 44. “Investment trust” is a term defined in the Corporation Tax Act 2010. The current approved investment trust arrangements allow immunity from corporation tax on capital gains. In order for investment trusts to be HMRC approved, certain conditions are set out in the Act. The clause, though, loosens the definition of “investment trust”. The previous requirement was that a company’s work must consist of investing its funds in shares, land or other assets, whereas the clause says that it is enough for “substantially all” a company’s business to consist of such investments.

While debating clause 43, we got the impression from the Government that they were tightening up a loophole, but I am slightly worried that clause 44 loosens and possibly relaxes the definitions. It is incumbent on the Minister to explain the rationale behind the move away from the tighter definition toward a looser one. What proportion of a company’s investments is sufficient to fulfil the new requirement that “substantially all” of its business consists of investing in shares, land or other assets? Does he feel that the measure might lead investment trusts to conduct their business beyond what they know to be part of their core activities, and to start taking on other aspects because they can now do so without losing their tax immunity? What sorts of activity do we expect to provide for by loosening the definition?

The practical effect of the clause is to expand the range of companies that can call themselves investment trusts and thereby take advantage of the immunity from corporation tax. It would be useful for the Minister to give us the calculation of what costs to the Exchequer will be involved in expanding the definition and consequently losing tax receipts. Will he shed some light on that?

Clause 44 removes an unintended consequence of changes to the tax rules for investment trusts introduced in the Finance Act 2011. The clause supports the Government’s objective of improving the UK tax system and ensuring that the UK remains a competitive location for investment companies.

Again, I will provide a bit of background to the clause. Investment trust companies are professionally managed, pooled risk-spreading investment vehicles. They are publicly listed and invest in a diversified portfolio of shares, securities or other assets with the aim of providing return to their investors. There are more than 200 investment trust companies in the UK, with total assets under management of about £60 billion.

Companies approved by HMRC as investment trusts are exempt from corporation tax on their chargeable gains, and companies that wish to be approved must meet and continue to meet certain conditions. One of those conditions is that the business of the company consists of investing its funds in shares, land or other assets with the aim of spreading investment risk and giving company members the benefit of the results of the management of those funds.

However, concerns have recently been expressed that the wording of the condition would prevent investment trust companies from engaging in ancillary activities, which was not the intended outcome. The clause addresses that unintended outcome. It amends the wording of condition A in section 1158 of the Corporation Tax 2010. It has effect in relation to accounting periods commencing on or after 1 January 2012. The change will make it clear that, provided that

“all, or substantially all, of the business of the company is” investing its funds in shares, land or other assets, with the aim of spreading investment risk, other, ancillary activities will not prevent condition A from being satisfied.

It is worth pointing out that that definition is similar to the rules that existed pre-2011 and makes it clear that all, or substantially all, of an investment trust’s business must be investing its funds. However, providing that a company meets the relevant conditions for approval as an investment trust, receipt of some ancillary income—for example, from stock lending fees—that might be treated as trading income for tax purposes, will not prevent it from being approved as an investment trust by HMRC.

To deal with the specific question raised by the hon. Member for Nottingham East, it is also worth pointing out that this measure has been assessed as having nil cost, and that is set out in the tax impact information note.

In conclusion—

Will the Minister give way?

I appreciate that using the words “in conclusion” always runs the risk of provoking an intervention. I fear I have fallen into that trap on this occasion.

It is not that those words wake me out of my torpor; it is just that I was waiting for the relevant moment to quiz the Minister on a couple of points. He gave one example of what ancillary activities might be—companies receiving stock lending fees or, in other words, income related to hedging or derivatives trading activities. Given that the existing definition talks about a company trading in

“shares, land or other assets”,

I am slightly surprised that it would be necessary to deal with that, for a start. However, does the Minister have other examples of what ancillary activities might be? The statute does not specify or define any. As far as I can see, it could involve any number of activities; it could be agricultural or manufacturing—it is probably neither of those, but it could be.

I can give another example. If an investment trust has excess office space, and it decides to rent out a floor or some space, that would constitute an ancillary source of income. It is worth bearing in mind that all, or substantially all, of an investment trust’s business must be investing its funds. Some kind of conglomerate that engaged in all sorts of activities, but which included some investment trust-type activities, would not satisfy the conditions. However, where an entity has a business consisting of investing all, or substantially all, of its funds, but it has, for example, a small amount of rental  income or a small amount of income relating to stock lending, that should not disqualify it from receiving the tax treatment that investment trusts receive and have received for some time.

The Minister makes a reasonable point, and I certainly understand the issue of letting out spare office space and so forth—a spare room subsidy would be one way of describing that arrangement. However, there is no schedule in the Bill describing what ancillary services are, so there is an anxiety about companies testing the boundary of the phrase “substantially all”. Again, that is not defined. Is “substantially all” 90%, 70% or 51% of a company’s activity? I know that is not defined in statute, but it would help the Committee if the Minister could give a flavour of what HMRC means when it says “substantially all”. That would give companies a clear guideline, so that they do not to try and test the meaning. I am worried about a loophole potentially being offered that a lot of companies will head towards.

I am sure that the hon. Gentleman would agree that were we to produce a list in legislation of what ancillary activities might consist of, we would run the risk of debating the issue on a regular basis, as we would need to amend it from time to time. Much though I am enjoying the debate, I am not sure that the rest of the Committee would necessarily appreciate that.

As for what “all, or substantially all” means, HMRC will consider the facts in any particular case, but providing that a company meets the relevant conditions for approval as an investment trust, we do not believe that receipt of some ancillary income—stock-lending fees, for example—should prevent it from being approved as an investment trust by HMRC. Essentially, that was the test that was applied pre-2011. I am not aware of significant concerns that were raised that investment trust status was being abused and that businesses were pursuing general activities beyond investing in order to benefit from the tax treatment for investment trust companies. I hope that provides some reassurance. Obviously, if there was evidence that the system was in any way being abused, HMRC would take that into account, and it would take measures to withdraw that status.

I do not disagree much with the Minister’s analysis, but I want to be clear how the clause has ended up in the Bill. It is not clear from his comments whether an enforcement problem had caused great anxiety among the investment trust community, or whether particular cases had provoked the need for it. It seems as though it is a generous response to a problem that I certainly had not heard much about before. What was the rationale for bringing it up in the first place?

The rationale, as I alluded to in my earlier remarks, is that we want the UK to be a competitive location for investment trust companies to be located. The reality is that there was concern in the industry about a risk, inadvertently, of some investment trusts fearing that they might lose their status, because of a small amount of ancillary activity that could take them outside the conditions. That was never the intention behind the 2011 regime, but none the less, it was a concern. I am aware that HMRC has seen examples  that could have led to investment trust companies losing their approval. Given that that was an inadvertent consequence of the changes that came into effect in 2011, we obviously wanted to address that point. HMRC monitors applications, and there are self-assessment returns. If there is a problem in that area, it would be addressed.

I am delighted that the hon. Gentleman is seeing the point that I am making, and that I am persuading him on the issue, just as I appear to have done on child benefit—[Interruption.] I am not sure that I heard the hon. Gentleman’s comment—I think he said that I have not persuaded him, but there we go.

You have not.

I am glad that we have that on the record; that is a further U-turn. Anyway, I should not be drawn into such areas, Mr Amess—I must go and report to the media monitoring people that we have another change of position.

In conclusion, the clause addresses the unintended consequence of the original legislation and it supports the Government’s objective of improving the UK tax system. I hope that it stands part of the Bill.

Question put and agreed to.

Clause 44 ordered to stand part of the Bill.