HC Deb 15 July 1987 vol 119 cc1201-2

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

Mr. Blair

I simply want to make sure that I understand correctly the effects of clause 74. As I understand it, under existing law a company will pay tax on capital gains at capital gains rate of 30 per cent. Under clause 74, a company will now pay tax at the full corporation tax rate of 35 per cent. On the other hand, companies will be able to use advance corporation tax in payment of tax on chargeable gains. I would be grateful if the Minister can confirm that that is the case. I have difficulty in construing the clause.

Mr. Norman Lamont

The hon. Gentleman is quite right. I can tell the hon. Gentleman sincerely that he comes to these debates, reads the clauses and constantly asks whether he has interpreted them correctly. He does interpret them rightly. He was correct in what he said on the previous clauses and he was also right in his summary on clause 74.

It may be for the benefit of the Committee if I go into a little more detail. There was some controversy about certain aspects of this point earlier. However, we hope that with the changes that we have made, particularly in clause 75, that some of the controversy has been removed. Clause 74 in conjunction with clauses 75 to 77 and schedule 5 amend the way in which tax on the capital gains of companies is computed and extends the scope for setting off advanced corporation tax as the hon. Member for Sedgefield (Mr. Blair) said.

Under present law, a company's capital gains are effectively taxed at 30 per cent. The effective rate is achieved by a fairly complicated mechanism. We take the capital gains made by a company and multiply them by six sevenths—the reducing fraction—and tax the resulting figure at 35 per cent. That gives an effective rate of 30 per cent. which applies to companies large and small. The small companies' rate does not apply to capital gains.

The point about ACT set-off has been made over many years. I think that it has been widely welcomed. It seemed to us that with the main corporation tax rate reduced to 35 per cent. the case for a differential lower rate on gains was necessarily much weaker and as the Chancellor explained in the Budget speech, for small companies the tax rate of 27 per cent. would be lower than the present 30 per cent. CGT rate.

Some people have said that the change is retrospective because it applies to gains accrued but not realised before Budget day. Of course, tax on capital gains is essentially a tax on disposals. Changes in the regime thus inevitably apply to the whole of the gain realised when a disposal is made. Essentially, we see that as a simplification of the system. Certainly the way in which capital gains are calculated seems to be unnecessarily complicated. We hope that this will be acceptable to the Committee.

Question put and agreed to.

Clause 74 ordered to stand part of the Bill.

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