GROUP RELIEF: MODIFICATIONS (Hansard, 9 July 1985)

§ The Financial Secretary to the Treasury (Mr. John Moore)
I beg to move, That the clause be read a Second time.

§ Mr. Speaker
With this it will be convenient to take Government amendments Nos. 56, 159 and 160.

§ Mr. Moore
Those hon. Members who were not on the Committee will, I hope, appreciate the detailed points that we have set out to help them in this unavoidably complex sector. The proposals given effect to by this new clause and schedule are relatively straightforward. Their main purpose is to allow companies that are at the same time both in groups and in consortia greater flexibility over the use of group and consortium relief for current losses. These are relaxations we have been urged to make in many representations and they will, I am sure, be widely welcomed. They should be particularly helpful to those industries, such as shipping and the emerging cable TV industry, where there are large-scale business ventures for which consortium arrangements are appropriate. These changes will also complement those we introduced last year in section 46 of the Finance Act 1984 which increased the maximum permitted number of member companies in a consortium and allowed some of the members to be non-United Kingdom companies or individuals.
These proposals are those that I announced during consideration of the Bill upstairs we intended to bring forward on Report. As I said then, we have for some time recognised that there is a good case in principle for these changes. The problem has always been that of finding workable solutions that do not entail adding further and excessive legislative and administrative complexity to what is already, technically, a very complex part of the tax code — I would not for a moment underestimate the added complexity encompassed within the new clause. For this reason, we decided initially that first priority in this year's Finance Bill had to be given to other matters. But in view of further representations on this matter since publication of the Bill, both from outside bodies and in consideration of the Bill upstairs, we believe it is right to act now without further delay.
As was argued so ably in Standing Committee by my hon. Friend the Member for Strathkelvin and Bearsden (Mr. Hirst) and the hon. Member for Sedgefield (Mr. Blair), who took an active part in our deliberations at that time, consortium arrangement can be of considerable commercial importance. Indeed, there are many new projects in a wide range of vital industries which are of such a scale that they can be financed only by the use of consortia. However, the effect of the present rules is such that companies concerned may not always be able to make full use of relief for current tax losses in this kind of arrangement, and our proposals are designed to remove these anomalies whilst — and this was the point which the hon. Member for Sedgefield quite rightly raised in Committee — seeking to ensure that in total no more than the right amount of relief is given and to the right companies. That is equally important.
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In this new clause and schedule we are proposing two main relaxations to the group relief provisions. Both of these proposals concern cases where a company is at the same time in the same group as one or more other companies and is also either a company jointly owned by a consortium or one of the joint owners of a consortium company.
908 I will deal with the changes very briefly rather than go into the detail we went into in Committee. First, under the present rules, if such a company has a loss or certain other excess reliefs, that loss may be surrendered to members of its own group as group relief, or it may be surrendered between the jointly owned consortium company and the companies which own it as consortium relief. But it cannot be surrendered partly as one and partly as the other. That is to say mixed surrenders are not at present permitted. For the companies concerned, this has meant that loss relief has been given later by carry forward rather than sooner by surrender sideways, in the current period. The first relaxation we propose is to allow such mixed surrenders, subject to certain conditions.
Second, at present, if a member of a jointly owned consortium company cannot make use of its share of that company's loss perhaps because it too has losses in the corresponding period, then its share can only be carried forward or back by the jointly owned consortium company. It cannot flow through and be claimed by other companies in the consortium member's group. Similarly, losses cannot at present flow through in the reverse direction, where a company in the consortium member's group has losses and the jointly owned consortium company has profits. This has meant that groups have had to think very carefully about which group member should own the group's interest in the consortium. The choice has often had to be dictated by tax rather than commercial reasons, and if the projections of future profits and losses of companies in the group turned out to be wrong—and they often do — this relief has been lost. The second relaxation we are now proposing will make it possible for consortium relief to flow through in these circumstances, in both directions, again subject to certain conditions.
These, then, are two desirable relaxations. We did not have the privilege of the company on the Standing Committee this year of my hon. Friend the Member for Croydon, South (Sir W. Clark), but I know that he was associated for some years with amendments on this subject. I am sure that the relaxations will also be warmly welcomed by people outside. Generally speaking, their effect will be to enable the companies concerned to get relief for any losses earlier than would otherwise be possible. These changes are simple enough in concept. To achieve them, however, I fear that, as Members will see, some fairly complicated legislation is required. This is partly because we are here dealing with possibly quite complex configurations of companies. But it is also because we need — and I stressed this in Committee — some new rules and some tightening up of certain existing rules to ensure that only the right amount of relief is given, and to the right companies, where there are these now somewhat complex mixed and multiple claims.

§ Mr. Tony Blair (Sedgefield)
Identifying the problem which the new clause addresses was relatively easy, but, as we thought, a solution has proved extremely difficult. These are complex legislative provisions and I should like to put one or two questions to the Financial Secretary about them, in order to make sure that at the same time as we are dealing with an anomaly we are not opening up undue possibilities of avoidance.
The two problems with which the new clause deals are mixed claims. The first is where the consortium company makes a loss and is prevented from surrendering it to its subsidiary company or to a member company. It can 909 surrender it to one or the other, but not to both. The second problem relates to flows, where a member company in the consortium has no profits against which the consortium company can set off losses, but members of the same group as that consortium member company have losses. This clause would enable flows across group members. The effect of new clause 30 is essentially to allow a consortium company to be treated as a full group member so that losses can be spread.
In general, we consent to the proposition advanced by the clause, but I should like some assurances on the record about avoidance or abuse. When we discussed this matter in Committee, the Financial Secretary rightly said that only a proportionate share of the losses of the consortium company should be allowed to be spread over the member companies or companies within the group of the consortium company. I should like an assurance that that is what these complicated legislative provisions do. If the amount of legislative print is any guide to the strength of the anti-avoidance provisions, they should be very strong indeed. However, as we know only too well, if even a small chink of avoidance appears the purpose of the clause can be subverted. I therefore ask for an assurance on the spreading of the proportionate share of the overall losses.
Am I right in thinking that the group or consortium relationship must exist throughout the entirety of the relative accounting period? That is important for avoidance purposes.
Finally, I asked upstairs what the cost, if any, of the introduction of this type of clause would be, and I was told that it was unlikely to be significant. On more detailed consideration, is there any flesh that the Financial Secretary can put on the bones of that remark and tell us exactly what we are debating? Such a clause is necessary because of the anomaly which had to be dealt with. We would like assurances that we are not initiating further anomalies at the same time as abolishing this one.

§ Sir William Clark (Croydon, South)
This new clause shows that the Treasury is one Department where we have to persist for probably double the time we have to persist with any other Department. I welcome the change of emphasis on the part of the Treasury.
Over the years the lack of this consortium relief has inhibited the expansion of some businesses. I am delighted that this is going to be remedied. No matter what this clause does—I am as much against avoidance as anyone else in the House—it will mean that a loss can only be used once. If a loss is incurred in a consortium and it is used, then, provided it is not used again, there cannot be any avoidance at all.
I take the point that it must be in the same accounting period, but any loss in a consortium should be used to the best advantage. In many cases, losses are made in building up expansion of the business, and it is doubly expensive if that loss cannot be set off against other profits.
I welcome the new clause and congratulate my hon. Friend on introducing it.

§ Mr. Moore
I thank my hon. Friend the Member for Croydon, South (Sir W. Clark). As I said earlier, he has been a persistent advocate in this area and it is nice to see his advocacy rewarded. I cannot, of course, assume, as he does, that it takes longer to persuade the Treasury to come to a rational set of conclusions.
I should like to give an unreserved assurance to the hon. Member for Sedgefield (Mr. Blair). In Committee, he 910 asked us to look carefully at the possibilities of avoidance. The Government were doing this when I commented on the other new clauses at which we were looking. In so far as the sharing of losses is given, I unreservedly say yes and yes again to the timing of the clause relating to companies years.
The hon. Gentleman will note the particular care that was taken to ensure that "entry in, entry out" was not an avoidance possibility. Devising the proper legislative solution caused great difficulty.
The hon. Member for Sedgefield also asked about cost. I had better not say more than I said in Committee. One feature of the clause is to tighten as well as to relieve. As my hon. Friend the Member for Croydon, South said, this is an area of potentially greater use, with larger projects, so there could be more opportunities for business, but the amount of revenue theoretically at risk is insignificant.
The hon. Member for Sedge field will remember that we are talking only about the cash flow impact—a timing impact — because the inability to take reliefs in the mixed surrender and flow-through manner merely delays the ability of a company to take relief and does not deny it. I hope that the hon. Gentleman will be satisfied with those assurances.