Carried-forward Losses

Finance Bill – in a Public Bill Committee am 2:45 pm ar 17 Hydref 2017.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

With this it will be convenient to discuss the following:

Amendment 22, in schedule 4, page 230, line 37, at end insert—

“188FAA Review of operation of this Part

(1) Prior to 30 June 2020, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of the provisions of this Part.

(2) The review shall consider in particular—

(a) the use and effects of reliefs under this Part,

(b) the effects on the Exchequer in each year of operation,

(c) a comparison of the amounts referred to in paragraph (b) and any official forecasts of those amounts prior to the introduction of this Part.

(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”

This amendment would require HMRC to undertake a review of the operation of the provisions for group relief for carried-forward losses.

Amendment 23, in schedule 4 page 247, line 2, at end insert—

55A (1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review in accordance with the provisions of this paragraph.

(2) The review shall consider the changes made in—

(a) paragraphs 24 to 26 of this Schedule in relation to insurance companies,

(b) paragraphs 27 to 46 of this Schedule in relation to certain creative industries,

(c) paragraphs 47 to 55 of this Schedule in relation to oil activities.

(3) The review shall consider in particular and in relation to each of the sectors mentioned in sub-paragraph (2)—

(a) the use and effects of the changes made,

(b) the effects on the Exchequer in each year of operation,

(c) a comparison of the amounts referred to in paragraph (b) and any official forecasts of those amounts prior to the introduction of this Part, and

(d) any effects on the economic activities of companies and others in each of the sectors mentioned in sub-paragraph (2).

(4) The Chancellor of the Exchequer shall lay a report of the review under this paragraph before the House of Commons as soon as practicable after its completion.”

This amendment would require HMRC to undertake a review of the operation of the provisions for carrying forward trade losses for insurance companies, creative industries and oil activities.

That schedule 4 be the Fourth schedule to the Bill.

Clause 19 stand part.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

These two clauses and the schedule represent the most complicated measures in the Bill, as I suspect everybody acknowledges. The corporate tax system and its rules on carrying forward losses present a maze of regulations and rules to be navigated by the heads of companies before they can claim relief. There is, therefore, some merit behind the Government’s measures to relax the rules around losses.

Under these measures, companies can set losses arising on 1 April this year against the total taxable profits, rather than particular types of income of a company and its group members. The amount of losses they can carry forward will be restricted to 50% and will apply to any losses incurred at any time. Of course, on top of that, each company or group will be entitled to a £5 million annual allowance of unrestricted profit, ensuring that 99% of companies are unaffected by the restriction.

I would like to ask the Minister how the £5 million figure for the annual allowance was reached. In addition, what consideration has the Treasury given to lowering or raising the threshold for unrestricted profit? The reforms being discussed today were first announced at the 2016 Budget. The Government then consulted on the measure in the business tax road map, as it was called, which I understand has led to this package of clauses and schedule.

The changes to the current rules have been encouraged because, under the old system, companies could offset all their eligible taxable profits through losses carried forward. That led to a situation where in some instances a large company pays no tax in a year when it makes a substantial profit. The majority of G7 countries already have restrictions of this kind in place.

I believe it is important to look at international comparisons and examine how other countries deal with this complex issue. From my research, it is clear that the big distinctions on how countries focus on carried-forward losses are: the length of time losses can be carried back; the length of time losses can be carried forward; and when losses can be shared with other companies.

First, we can see that the length of time that losses can be carried back to allow a refund of previous tax paid varies in other countries. In Australia, there is no limit, while the length of time is two years in the United States, and three years in Canada. Similarly, the length of time that losses can be carried forward to future years and offset against future profits is wide-ranging. The limit is 10 years in Canada and 20 years in the United States. In the UK and Australia, the length of time is indefinite. The final distinction is on when losses in other countries can be shared with other taxpayers, such as parent and/or sister companies. On that note, will the Minister inform the Committee how much work the Treasury has undertaken in examining and comparing the approaches that other countries take to carried-forward losses? What merit is there in the UK Treasury adopting best practice?

The anti-avoidance measures in clause 19 specifically will extend the loss refresh anti-avoidance rules in the Corporation Tax Act 2010 that prevent arrangements designed to convert carried-forward losses into in-year losses, which can be used more flexibly in terms of carried-forward UK property business losses and carried-forward non-trading losses on intangible fixed assets.

The measures will also change the timeframe within which a major change in the nature or conduct of a trade can occur. That timeframe will be extended from a period within three years of a change to a company’s ownership to five years. That extended timeframe applies only where the change in ownership and the major change in the nature and conduct of a trade occur on or after 1 April 2017. The Government state in the explanatory notes:

“This change will ensure that where a company undergoes a change in ownership, and a major change in its business (within the relevant timescale) that involves a major change in a trade or business that has generated carried-forward losses, any losses arising from that trade or business before the change in ownership will be disallowed completely, and cannot be set against future profits or claimed as group relief”.

Under the measure, a company may not claim group relief for any losses arising in a company before that company was acquired. The measures apply when a company

“acquires an asset under the intra-group transfer rules such that no gain or loss arises on the transfer, and, within 5 years of the change in ownership, that company makes a gain on the disposal of the asset.”

As the explanatory notes state, the Bill

“introduces new timescales within which a major change in the business of a company or a co-transferred company must take place…The rules apply where a major change in a trade takes place within a period of 5 years of the change in ownership…or where a major change in an investment business takes place within a period of 8 years beginning 3 years before the change in ownership…This means that where there is a major change in a trade or business that has generated carried-forward losses, any losses arising from that trade or business before the change in ownership will be disallowed completely, and cannot be carried forward against future profits or claimed as group relief”.

The Opposition fully support measures that clamp down on tax avoidance and deter companies from abusing the carried-forward loss mechanism, but the measures need to be tested further, particularly when looking at the number of opt-outs that clause 18 and schedule 4 give, for example, to the oil and gas industry, the creative industries, Northern Ireland and the insurance industry.

With the specific sector-wide opt-outs, there is concern that companies may, but not necessarily will use carried-forward losses as a way to avoid taxation. The creative industries bring more than £84.1 billion to the UK annually. Under the changes, a loss made in the separate film trade may be carried forward from a pre-completion period to a relevant later period. Where that is the case, the amount of that loss not attributable to film tax relief can be treated as a loss in a later period. We can all imagine a scenario where a film company uses those measures to avoid tax—I am not saying they will do that—by repeatedly carrying forward losses from one failed film project to another. Of course, that would be a wholly unique example, and is not reflective of the industry as a whole. I really want to emphasise that: it is not reflective, but it is why the Opposition are keen to push for a review of the effectiveness of the opt-outs given to the creative industries, insurance companies, and oil and gas companies in the Bill.

I want to turn to banking losses covered by the banking sector. In the 2016 Finance Bill, carried-forward losses for the banking sector were reduced from 50% to 25%. We are now 10 years on from the global financial crisis, and can all see the merit and importance of regulating the amounts of losses that banks can keep on their books, given that at the height of the crisis the Office for National Statistics records that the Government had to spend £1.6 trillion bailing out the banks. Although 25% may seem like a stringent figure, it may still be too high given the billions of pounds’ worth of risks that banks have on their balance sheets throughout the year.

Durham University finance and economics professor Kevin Dowd—no relation, to the best of my knowledge—recently wrote a report published by the Adam Smith Institute, which said that British banking remains

“an accident waiting to happen.”

He criticised the Bank of England’s stress tests as being wholly inadequate, masking the fact that banks are more leveraged now than they were 10 years ago. The Governor of the Bank of England himself has said that UK banks are already forgetting the lessons of the global financial crisis, and it is our responsibility to remind them.

Given the renewed concern about the banking system and the added risks that banks may take in the light of Brexit, what consideration has the Minister given to lowering the figure at which banks can carry forward losses, and does he accept that there may be a case for limiting it further? If we continue to have an economy with, let us say, stagnant growth, high inflation, as the figures indicate today, poor productivity—30% below the Germans—and one of the lowest levels of investment in Europe, we are inevitably putting ourselves once more at the mercy of the banks. The Minister may doubt what I say, but I think that is pretty much a fact.

Photo of Kelvin Hopkins Kelvin Hopkins Llafur, Luton North 3:00, 17 Hydref 2017

There is a lot of evidence that the banks are still engaging in risky gambling on the international exchanges, and compensating for that by squeezing ordinary taxpayers, ordinary bank customers and small businesses in particular to back up their gambling losses. Would my hon. Friend say that we are still facing danger in the future because of the banks’ behaviour?

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

We always have to be vigilant—that is the key. Vigilance is crucial. Virtually no one had experienced anything like the banking crisis in living memory. Given that, we have to be on our guard that we do not all breathe such a sigh of relief that it was so long ago that we lose our vigilance.

It seems to me that strong regulations, which will not only protect the taxpayer and their savings, but develop practices at the heart of the industry, are the only bulwark against another financial crisis being created and enacted through reckless banking practice. I hope that the Minister will give some thought to that, particularly given that when we finish the summer-autumn Finance Bill we will immediately start the winter Finance Bill. Given the Government’s delayed and, I have to say, sometimes chaotic timetable, it will no doubt end up being called the spring Bill instead. Dare I say it, we have a Minister who is the man for all seasons in that regard. [Interruption.] Don’t give up the day job, as they say—or perhaps hon. Members would like me to.

Many of the stakeholders to whom the Opposition spoke raised concerns about the complexity of the proposals and the speed with which the Government have attempted to take them through.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I am grateful to my hon. Friend for running through many of the problems that stakeholders have mentioned to us. One addition to the many ambiguities he mentioned is that, to my mind, a clear rationale does not seem to have been provided for the decision to loosen the rules so that past losses can be offset against any type of profit, rather than the current position of only being able to offset them against the same type of profit—for example, only offsetting trading losses against trading profits. That is yet another change for which we perhaps require further information and debate.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury

My hon. Friend makes another good point. The Chartered Institute of Taxation has criticised the Government—“criticise” is the word I use, although I am not sure it would say that; it would most probably say it has brought this to the Government’s attention—for not balancing

“its desires to raise some modest revenue with its duty to produce legislation that can be followed with predictability and certainty.”

Other financial organisations have argued that the measure is likely to create winners and losers. Small groups unlikely to have £5 million of losses, for which this is a high proportion of the total, will benefit from the change. For large groups that wish to access the group relief changes, it is less clear. Deloitte has argued that the slowdown in offset of brought-forward losses for large groups may in fact mean an acceleration in the tax cost for larger companies. Will the Minister offer more clarity on how the group relief will work in practice—particularly the nomination process, whereby a specific company has to be nominated to manage the whole group relief?

The measure seems fraught with potential dangers. For starters, the Bill makes no mention of what happens when a company chooses to join or leave a group that benefits from the group relief. Will the Minister explain whether such a mechanism will be built into the legislation, or whether we will need a further clause in a future Finance Bill that tinkers with carried-forward losses once more? Given the uncertainty felt by many in the business community, the Opposition believe it is only right that the Government submit a review of the operation of the group relief in the carried-forward losses, assessing the cost and impact of the new restrictions and how they will impact on large companies.

Photo of Mel Stride Mel Stride Financial Secretary to the Treasury and Paymaster General

Clauses 18 and 19 and schedule 4 make changes to the rules for corporation tax losses, as we have discussed. They modernise the losses rules by increasing their flexibility, while at the same time ensuring that companies pay tax in years when they earn significant profits. When a company makes a loss, it can carry it forward and use it to offset the tax liability of certain income in future years. Carrying forward losses is an important feature of the tax system and ensures that the tax paid by companies is proportionate with their profits over the long term.

However, these loss relief rules are not reflective of the way businesses operate and are out of step with international practice, which I shall come on to in a moment. First, carried-forward losses can typically only be set against profits from the activities to which they relate, as the hon. Member for Bootle pointed out, rather than the profits of other activities in a company, or the profits of other companies within a group. Secondly, the absence of any restriction on the amount of taxable profit that can be relieved by carried-forward losses means businesses making substantial UK profits may not pay any corporation tax due to losses incurred on historic activities.

The clauses will have effect from 1 April 2017, in line with the commencement date previously announced by the Government. The changes made by clause 18 will mean that rules will be relaxed for losses arising from 1 April 2017 that are carried forward, such that those losses can be set against the profits of different activities within a company and the taxable profits of its group members. As we have said, the amount of annual profit that can be relieved by carried-forward losses will be restricted to 50% from 1 April 2017, subject to an allowance of £5 million per group.

The hon. Member for Bootle asked specifically about that £5 million figure, and about whether the Treasury has looked at international comparisons and factored that into its thinking on this matter. I assure him that it has. This rate is more generous than the rates in a number of other countries. In Germany, for example, the rate is €1 million. As he pointed out, the main rationale for focusing the restriction above £5 million is to bear down on the top 1% of profitable businesses in the country without going further down the spectrum. We believe that we have achieved the right trade-off between the level of the figure and the number of companies that will potentially be affected by the restriction.

The amount of annual profit that can be relieved by carried-forward losses will be restricted to 50% from 1 April. That restriction will address a public concern by helping to ensure that companies that make substantial profits pay tax. It is worth dwelling on that point for a moment. There is a general feeling among the public that large companies, when they make a lot of profit, should pay to support the public services that we are all in favour of.

The restriction focuses on the largest companies. Due to the £5 million allowance, as the hon. Gentleman recognised, 99% of companies are forecast to be unaffected by the restriction, but all companies will benefit from the more modern and flexible loss-relief regime. The changes in clause 19 will stop companies entering into avoidance schemes to exploit the rules introduced by clause 18. Taken together, the loss-relief reforms will raise more than £1.6 billion over the next five years.

Amendment 22 would require HMRC to undertake a review of the operation of the provisions that introduce group relief for carried-forward losses. The current rules for carried-forward losses do not reflect the way businesses operate in practice and can lead to the unfair outcome of losses being worth more to some companies than to others, depending only on their group structure. The provisions to allow carried-forward losses to be set against the profits of group members are an important step to modernise the regime. The Bill will also introduce robust anti-avoidance provisions, to ensure that the new flexibility does not lead to opportunities for abuse. As with all policies, the Government will monitor the regime closely once it commences to ensure that it operates as intended.

I urge hon. Members to reject amendment 22. A mandated formal review is not an appropriate response to provisions that have been widely consulted upon and carefully designed. On anti-avoidance, the hon. Gentleman rightly raised certain circumstances that the Bill will deal with. For example, it will ensure that companies do not abuse the buying-in of losses by taking over other corporate bodies, or by using losses from trades that are not carried out by the acquiring company, which can be done using various devices.

The hon. Gentleman asked why there is a carve-out for creative industries under these arrangements. That is because they are subject to special rules when it comes to losses. While a creative project—a film, for example—is ongoing, its losses cannot be surrendered to companies in the same group. That means that the company is not able to use losses in the flexible way that other companies can. Those special rules are an anti-avoidance measure, and including creative losses in the relaxation part of the loss reform would risk opening up avoidance opportunities, which we clearly do not wish to happen.

The hon. Gentleman also asked about banks. He suggested that restricting the use of bank losses to 25% might be too generous. I remind him that banks are already subject to an 8% corporation tax surcharge and a levy on their balance sheets, which is not an approach that we have taken to other sectors of the economy. Further restrictions on losses on top of the specifically designed tax regime to reflect the unique position of banks in the economy would be disproportionate.

I turn to amendment 23, which would require HMRC to undertake a review of the operation of the provisions for carried-forward losses for insurance companies, creative industries and oil activities. It may be helpful if I explain why those sectors are being treated differently.

The provisions relating to insurance companies prevent the reforms from reducing the value of individuals’ life assurance policies. The loss-relief reform is intended to apply to companies, and the unique structure of the life assurance industry means that it is necessary to make these provisions to prevent individuals from being unfairly impacted. As I said, the reforms have not been applied to creative industries because they already face high restrictions on the use of losses for anti-avoidance reasons, and the oil and gas regime is subject to a bespoke ring-fenced tax regime that prevents taxable profits from oil and gas extraction from being reduced by losses from other activities. It is right to maintain the integrity of that regime by continuing to treat it separately.

These clauses and the schedule introduce new rules that will modernise the UK’s loss relief and will help to ensure that businesses cannot use carried-forward losses to pay no tax in each accounting period in which they make substantial profits. I hope that Opposition Members will not press their amendment, and I commend these measures to the Committee.

Photo of Peter Dowd Peter Dowd Shadow Chief Secretary to the Treasury 3:15, 17 Hydref 2017

I tried to set to out as comprehensively as I could, without getting too complicated, complex or specific, why we were concerned to keep tabs on this. Trying to keep tabs on the Government’s proposals has been today’s theme, and that is why we have asked for reviews. In the current climate, when there are so many pressures on public services and a range of challenges for the country, we are all concerned to ensure that organisations that benefit from our fantastic country and from the protection of the rule of law pay their dues. That is not to point the finger at anyone specifically to say they are not paying their dues, but to ensure that we to some extent guard the guards. That is what we are trying to do today: to guard the guards; that is our job and our responsibility. Given the Minister’s explanation, we will not press the amendment, but no doubt we will come back to these issues in due course.

Question put and agreed to.

Clause 18 accordingly ordered to stand part of the Bill.

Schedule 4 agreed to.

Clause 19 ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Graham Stuart.)

Adjourned till Thursday 19 October at half-past Eleven o’clock.