Clause 76 - Close companies

Part of Finance Bill – in a Public Bill Committee am 3:30 pm ar 11 Mehefin 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury) 3:30, 11 Mehefin 2013

I thank the Minister for outlining the purpose of the clause and the Government’s amendments.

The tax information impact note suggests that the changes will result in additional receipts for the Exchequer of £65 million in 2014-15, £75 million in 2015-16, £70 million in 2016-17 and £60 million in 2017-18. Such additional receipts are of course absolutely welcome. However, I would like the Minister to clarify some of the key facts behind the schemes established to avoid the tax charge under section 455 of the Corporation Tax Act 2010. At what point did the Government become aware of the existence of such schemes, and how did they become aware of them? Were the schemes being marketed? To date, how many close companies have sought to use the loopholes? Over what time period, and at what cost to the Exchequer—if that can be assessed—has the avoidance occurred? What attempts has HMRC made to challenge the use of such schemes before the changes took effect on 20 March 2013?

I would also be grateful if the Minister addressed several technical concerns about the Government’s proposed changes. While welcoming attempts to counter avoidance of tax under section 455, the Chartered Institute of Taxation states that there are some situations where it considers that

“the changes will operate unfairly and have unintended consequences”.

In the CIOT’s words, those unintended consequences include

“the fact that the revised section 455(1)(c) CTA 2010 will mean that any loan from a close company to a partnership where there is a participator in the company who is also a partner in the partnership will result in section 455 tax. This seems to be regardless of whether the money lent is then taken for personal use of the partner/participator (which is the sort of abuse that needs to be tackled) or used for the business purpose of the partnership (which may be for valid commercial purposes). In particular loans to limited liability partnerships (LLP) are specifically brought within the scope of the charge.

There are circumstances where a close company sets up an LLP for sound commercial reasons, perhaps as an alternative to a subsidiary company. The LLP may need funds to start trading. If the close company lends the LLP funds for commercial reasons, it does not seem right to us that there will be a section 455 charge if the individual, who is a participator of the company and also a member of the LLP, is receiving no benefit.”

The Chartered Institute of Taxation is also concerned that the provisions introducing the new charge to counter other arrangements are widely drafted. We should therefore welcome clarification of the scope of the charge. The institute stated:

“Firstly, we would like the Government to confirm that the new charge, being introduced at Chapter 3A Corporation Tax 2010, will not apply to capital transactions (including circumstances  where a close company reduces its capital under section 641 CA 2006). Capital transactions have their own rules and anti-avoidance provisions, which are generally well understood, and they are not part of the mischief that Chapter 3A is targeting.

Secondly, both examples provided in the Finance Bill explanatory notes use hybrid structures, which seem to be the main aim of this provision. However, there appears to be nothing to prevent the rule virtually applying as a general anti avoidance rule to catch almost any instance where a company is party to a transaction with some tax planning, however benign, that has some indirect effect on a participator or his associate.

This is in effect a general anti avoidance rule for smaller companies and yet has none of the safeguards that surround the new General Anti Abuse Rule. In addition, the rule is already in effect—it took effect from Budget Day.

Unless the Minister is able to give categoric assurances about the scope of these new provisions, we think some amendments are required to the provision to set clear boundaries, e.g. to exclude transactions with a commercial motive as one of the motives. Otherwise it could catch many commercial transactions. Clear guidance will be required to demonstrate the areas that it may cover.”

As for new chapter 3B, which is intended to strengthen the rules that deal with repayment of loans, the institute stated:

“We support the objectives of the provisions in new section 464C(1), which apply where loans are repaid and new loans made within a period of 30 days. However, we have concerns about the drafting, which in some cases appear to lead to some unfortunate unintended results…The purpose of the new rule seems to be to deny relief for a repayment of the loan just before a cut-off date, such as the year-end or nine months after the year-end, where within 30 days that loan is taken out again. We agree with that purpose, but as drafted it also seems to deny relief for repayments of loans during the year if there is a further loan within the year, yet the tax is still payable on the further loan. This seems inequitable as in such cases even if a loan is fully repaid the tax could be payable…We think the reason that the legislation can produce an unintended result is that the drafting seems to be based upon an incorrect assumption of how the existing legislation works. It seems to assume that it was written using the ‘year-end approach’ rather than the ‘separate transaction approach’...Under the pre-Schedule 28 legislation the ‘year-end approach’ and ‘separate transaction approach’ lead to exactly the same amount of s455 tax and s458 repayments…The intention of the clause seems to be to match repayments and loans around the cut-off dates of the period end or the normal due date, so as to prevent any anti-avoidance through repaying a loan just before e.g. the due date, and re-borrowing it just after, but it seems that the clause goes much further than this.”

The institute goes on:

“Under new s464C the two approaches lead to different results, and in the case of the statutory ‘separate transaction’ approach it seems that the answer is often undesirable and unintended. It appears that the effect of the new legislation is that a s455 charge can arise on more than has been lent by the company”.

I accept that resolving those specific worries is the intention of amendments 65 to 69, but I shall be grateful if the Minister can also deal with the other concerns raised by the Chartered Institute of Taxation about the clause to ensure that all such matters are considered, and that we shall not return to Committee to deal with the unintended, unfortunate consequences of the anti-avoidance measure that have been described.