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The Economic Secretary to the Treasury (Mrs. Angela Knight): I shall try to answer the points that have been made to me.
I start with the amendment tabled by the hon. Member for North Warwickshire (Mr. O'Brien). He should keep in mind the three basic principles that I repeated in Committee several times--that the tax should recognise all debits and credits, calculated according to recognised accounting methods, and the figures should follow those produced in the accounts wherever they are acceptable. That covers the points that he made.
Subsection (5) of what is now clause 74 is intended to give reassurance that, if a loan relationship is fully within the new rules, these are comprehensive and cover all aspects of that loan relationship, but clearly, where only the interest element of the loan relationship or interest on a debt that is not a loan relationship is within the new rules, those rules can apply only to that interest. Any other elements of the debt, such as capital gains or losses, are automatically dealt with under the appropriate separate legislation.
The point that the hon. Member for North Warwickshire made related to interest on late payment of a trade debt. Supposing that a company sold some widgets to another company for which the second company had not paid and interest was charged on that debt as a trade debt, the interest would be dealt with under the chapter II regime; the trade debt would be dealt with as a trade debt as it is at the moment. That is the principle behind current legislation; that is the principle that will be followed with the chapter II rules. Indeed, it fits in with what is now clause 94. The existing rules include all forms of interest, however they arise; the new rules cover only interest arising on loan relationships. Clause 94 sweeps up other interest not arising from loan relationships, such as interest on compensation awards and on overdue trade debts.
One of the difficulties with the amendment moved by the hon. Member for North Warwickshire is that it creates ambiguity. I accept that he is trying to put clarity into the situation, but the amendment would create an ambiguity. For example, there are many true loan relationships that are and should be fully within the new rules, whereas in practice the only debits and credits that are required to be brought into account under the new rules relate to interest. Most straightforward loans from a bank are likely to fall into this category.
As the hon. Gentleman knows, the vast majority of companies in this country have straightforward loans from banks. Therefore, they already account on an accruals basis, they are already taxed on an accruals basis and they fall within this legislation--they do not have to make any changes because the methods by which they already account and are taxed are fully covered. If he were to press his amendment and if it were part of the legislation, it would create a picture of companies shopping around old and new legislation.
I suggest to him that the first thing that would happen is that a couple of lawyers would look at the legislation and say that the points in his amendment were covered by
the clause before it was amended. They would seek to see why we had put a legal tautology into the Bill, and that would result in us opening up an ambiguous situation that is currently covered. The way in which it has been set out in the clause as it stands is not unusual, has not attracted much attention and better sets out the position that we are trying to ensure by this chapter and by these rules. I urge the hon. Gentleman not to push his amendment any further.
I turn now to the amendments tabled by my hon. Friend the Member for Milton Keynes, South-West(Mr. Legg)--that is, amendments Nos. 51 to 58. He made many of these points in Committee and, on reflection, I believe that what he proposes is correct. His amendments refer to anti-avoidance measures in schedule 8, and the part of the schedule to which the amendments refer is tax relief on interest on loans between connected companies.
In effect, my hon. Friend is seeking to change the rules as they are set out in the schedule to cover what is perhaps commercial reality. He is seeking to ensure that where two companies are connected, they are accounting on an accruals basis, with only the odd exception. The lender company A is being taxed on the interest that it is accounting as receiving, even though it has not received it. I believe that my hon. Friend's amendments--both in relation to interest and the other more complicated set of amendments--are acceptable. I urge my hon. Friends to agree with the amendments.
Mr. Mike O'Brien:
I am interested in the fact that the Minister is accepting the amendments proposed by her hon. Friend the Member for Milton Keynes, South-West (Mr. Legg) and I entirely accept that. Did the Inland Revenue have any part in drafting the amendments? Did it approve them? The suspicion might arise in the minds of some more suspicious than I that these were Government amendments that Ministers felt--because of the level of embarrassment with these things over loan relationships--they might prefer in a Back Bencher's name. However, I am sure that that is not so.
Mrs. Knight:
This was discussed at some length in Committee and I then discussed it further with my hon. Friend. I felt that he put a good case in Committee.We have ensured that the amendments that have been drafted are legally correct--that is a perfectly sensible route to take. My hon. Friend highlighted these points in Committee and showed what could be the commercial consequence if we retained the tighter anti-avoidance provisions for companies that come within the chapter 2 provisions, and there could be some difficulties.
As I have said so many times during the course of the Bill, where a good case is put to us--by whomever it might be--we would be remiss if we did not accept it as being good and accurate, and did not accept the amendments accordingly or, as I have done, place them where we felt it was right to do so. My hon. Friend made a point about joint venture lenders. As I said to him earlier, we believe that the provisions will work satisfactorily.
My hon. Friend also raised the issue of building societies and their concern when they were converting to public companies. I assure my hon. Friend that Inland
Revenue officials and I are aware of the building societies' concerns and are in correspondence with their representatives regarding conversions and takeovers. Our current understanding of the position is that there should not be a problem. It appears that the relevant transactions can be structured so as to avoid any difficulties. Although we cannot give reassurances about hypothetical situations, if real problems emerge in the future we will be happy to consider them. I hope that my hon. Friend finds that response satisfactory.
The next points were raised by my hon. Friends the Members for Fulham (Mr. Carrington) and for Gloucester (Mr. French). I hope that they do not mind me saying that their points are variations on the same theme. The Government are aware of concerns that have been raised by my hon. Friends and by others regarding the particular anti-avoidance provisions in paragraph 13. This paragraph was amended significantly in Standing Committee but, because of the concerns that my hon. Friends and others have raised, I take the opportunity to allay some of the fears that have been expressed about the anti-avoidance rules.
Paragraph 13 of the schedule disallows tax deductions to the extent that tax avoidance is the main motive behind a loan relationship. We have been told of concerns that this could be interpreted as preventing companies from getting tax relief for legitimate financing arrangements.I am happy to offer a reassurance that this is not the intention of the legislation. The paragraph denies tax deductions on loans that are for the purpose of activities outside the charge to corporation tax. Among other things, this will ensure that United Kingdom branches of overseas companies do not get tax relief for borrowings that are for overseas activities outside the United Kingdom tax net.
We have been asked whether financing--which, for example, is to acquire shares in companies, whether in the United Kingdom or overseas, or is to pay dividends--would be affected by the paragraph. In general terms, the answer is no, but the paragraph might bite if the financing were structured in an artificial way.
It has been suggested that structuring a company's legitimate activities to attract a tax relief could bring financing within this paragraph--some have gone so far as to suggest that the paragraph might deny any tax deduction for borrowing costs. These suggestions are clearly nonsense. A large part of what the new rules are about is ensuring that companies get tax relief for the cost of their borrowing.
One specific point has been put to me by my hon. Friend the Member for Gloucester--that is, borrowing by a finance leasing company to acquire assets where this is more tax efficient than the lessee investing in the assets direct. Again, I am happy to offer a reassurance. Where a company is choosing between different ways of arranging its commercial affairs, it is acceptable for it to choose the course that gives a favourable tax outcome. Where paragraph 13 will come into play is where tax avoidance is the object, or one of the main objects, of the exercise.
Companies that enter into schemes with the primary aim of avoiding tax will inevitable be aware of that. The transactions we are aiming at are not ones which companies stumble into inadvertently. As one top tax adviser said recently, companies will know when they are into serious tax avoidance; apart from anything else, they are likely to be paying fat fees for clever tax advice and there will commonly be wads of documentation.
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