AMENDMENT OF SECTION 21 OF THE FINANCE ACT 1972 (Hansard, 10 July 1973)

§ Mr. Peter Rees (Dover)
I beg to move, That the clause be read a Second time.
The clause has a modest and limited objective, and it claims no special elegance of draftsmanship. It is designed to cover a situation where a group of companies has set up a pension fund with one of the companies in the group acting as trustee of that fund. As the law stands, the fund itself will not be treated as part of the group of companies because, on a strict view, the fund itself is separate and distinct from the companies which act as its trustee.
It may happen in that situation that one of the companies in the group provides management services for the fund and will be obliged to charge VAT. It seems to me that that is a purely domestic matter, and it bears hardly on the fund that it should in effect suffer VAT in that situation. It is this hardship that the clause is designed to remedy. I hope that my hon. Friend the Financial Secretary will be able to offer some kind of relief.

§ Mr. Higgins
I listened with great care to what my hon. and learned Friend the Member for Dover (Mr. Peter Rees) said because, when the new clause first appeared on the Notice Paper, naturally I gave it close attention. I have to confess that I had some difficulty in appreciating precisely what was the point at issue.
In moving his new clause, my hon. and learned Friend has been commendably brief. But I am afraid that on this 1439 occasion his degree of brevity has resulted in some obscurity. Therefore it may be that even at this late hour he will wish to come back on the matter.
As I understand it, the object of the clause is to allow a company which acts as trustee for a pension fund, and which is itself eligible to be included in a group registration, to treat the business of the fund as being carried on by the representative member of the group. The House will recall that we debated representative members of a group at some length last year. The pension fund is usually exempt from VAT and therefore not entitled to register or to deduct the tax on its inputs.
So far so good. I am afraid that the story then becomes more complicated. When a person carries on a business both in his personal capacity and in the capacity of a trustee there are potentially two registrable persons. When a company which is one of a group of companies registered as a group acts as a trustee, the company, in its capacity other than as a trustee, is treated as part of the group and in its fiduciary capacity would, if registrable, be registered separately so that the business of the trust is kept entirely separate from the other business of the company or the various businesses of the group.
I think that on reflection my hon. and learned Friend will appreciate that that is a desirable situation. The clause, as drafted, would enable the business of the trust to be treated as being carried on by the company in its own capacity—that is, as part of the group.
The House will recall that Section 21(1) of the Finance Act 1972 provides that, in the case of a group of companies registered as such, the businesses of the various members of the group are to be treated for tax purposes as the business of one member, called the representative member, and that that company alone accounts for the total tax due from the group. However, all member companies of the group bear joint and several liability for the tax due, so that any member company may be sued for the tax liability of the whole group. I repeat, because it is a crucial point, that any member company may be sued for the tax liability of the whole group.
That being so, under the present practice, a pension fund, of which a member 1440 company is the trustee, is not regarded as part of the group's business for VAT purposes. But the clause may—I stress the word "may", because I gather the point is not beyond doubt—have the effect of including it in that business and thus bringing it within the joint and several liability for the whole group's VAT.
The point is not entirely free from doubt, but we think there is a real risk to pension funds if the clause is accepted. There are further additional complications, but I regret to say that the matter is not entirely clear. The clause, as drafted, does not require that the company acting as the trustee of a pension fund and the company for whose employees the pension fund provides shall both be members of the same group. It is conceivable that they may be members of different groups.
None the less, I think that my hon. and learned Friend has appreciated the point which I am seeking to make. I apologise for having to spell it out at some length. If the effect of the clause is as we suppose, it means that the pension fund might find itself liable for the VAT liability of the entire group. I think my hon. and learned Friend will appreciate that is probably not a position in which a trustee would wish to find himself. Indeed, as I understand and am advised, it would be normal to keep the two operations entirely separate.
Therefore, in seeking to achieve his objective, my hon. and learned Friend seems—I was about to say to have thrown out the baby with the bath water, but I am not sure that is the right way to put it—to have endangered what would generally be recognised as a basic principle—namely, that the two operations should be kept separate.

§ Mr. Peter Rees
I confess that if the clause has strained the Financial Secretary, his explanation has somewhat strained me. I cannot accept that trustees would be at risk. No doubt my hon. Friend has received good legal advice, and at this late hour I shall not press him to ask the Solicitor-General to come here to elucidate nominees of this kind.
I remain unrepentant about the merits of the clause, and the arguments advanced by my hon. Friend did not strike me as cojent. I see good reasons for discriminating in favour of pension funds. There is no reason why preference should not be given to pension funds which select companies inside the group. However, as we are both taxed by the implications of the clause it would be churlish to reject my hon. Friend's invitation to pursue it on another occasion in more depth, and on that basis I beg to ask leave to withdraw the motion.