LIMITATION OF GROUP RELIEF IN RELATION TO CERTAIN DUAL RESIDENT COMPANIES (Hansard, 15 July 1987)

§ Sir William Clark
I beg to move amendment No. 11, in page 32, line 15, at end insert— 'Provided that this subsection shall not apply where the loss arises from carrying on a trade on a commercial basis with a view to profit or where the relevant amount is a charge on income, which may be surrendered in accordance with section 259(6), and is either incurred for the purposes of the 1188 trade carried on by the surrendering company or is only available for surrender under that subsection because or section 15(5) of the Oil Taxation Act 1975.'.

§ The Temporary Chairman (Mr. David Knox)
With this it will be convenient to take the following amendments:
No. 12, in page 33, line 10, leave out from 'period' to second 'or in line 11 and insert 'its main functions consist'.
No. 13, in page 33, line 29, leave out paragraph (b).
No. 14, in page 34, line 5, at end add— '(8) Nothing in this section shall be taken to apply to genuine trading companies.'. No. 15, in clause 64, page 34, line 22, at end insert— 'provided that this subsection does not apply where the successor is a trading company immediately prior to the transfer of the trade.'. No. 16, in clause 64, page 34, line 28, at end insert— 'provided that this does not apply where the asset will be used for the purposes of the trade of the dual resident or where the asset is transferred by a non-resident and represents shares as defined in section 38(2)(c), Finance Act 1973.'. and No. 18, in clause 64, page 35, line 19, at end add— '(8) This section shall not apply to—
(a) companies excluded from the operation of section 48, by reason of subsection (8) of that section, or

(b) the disposal of any asset used for trading purposes.'.

§ Sir William Clark
This amendment covers clauses 63 and 64. I am worried about the effect of those clauses. It seeks to ensure that a genuine trading loss, which is incurred by a dual resident, a company or whatever, can still be surrendered to another group company by way of group relief.

§ Mr. Austin Mitchell (Great Grimsby)
Oh!

§ Sir William Clark
If the hon. Member for Great Grimsby would just listen he would, for once, learn something.
The amendment also seeks to retain the ability to surrender a loss arising from a charge on income, for example, interest payable on a loan, to the extent that the charge is incurred for the purposes of its trade.
Finally, it attempts to deal with a problem peculiar to oil companies. I admit here that I am a consultant to the Texaco Oil Company. The problem arises from the additional corporation tax restrictions imposed on oil companies. An oil company cannot offset charges on income against oil extraction income unless those charges meet the specific tests set out in section 15 of the Oil Taxation Act 1975. No such tests apply to non-oil companies, which can obtain their relief by offset against their profits, including trading profits. Previously, limited relief could have been obtained by surrender as a result of section 15(5) of the Oil Taxation Act 1975, inserted by the Finance Act 1982. Clause 63 may prevent this if an oil company is a dual resident. The amendment seeks to restore the position so that the new rules do not prevent relief in cases where relief is available only as a result of Section 15(5).
It is agreed that some companies have obtained tax relief in two countries—that is, in this country and in another country. I am advised that, unamended, the clause would mean that a company could not claim tax relief in either country. Quite obviously, this would be as wrong as claiming it in two countries.
The clause should exclude those companies whose main function is trading. If their main function is trading, whether they be oil companies or not, they should not be 1189 put in a position different from that of any other company. I do not know whether my right hon. Friend the Financial Secretary will agree, but there is ambiguity about balancing charges or balancing allowances on transfer between dual companies.
The clauses are far reaching and will have quite an effect on many companies. Why date the legislation from 1987 without giving those companies the opportunity of not necessarily re-arranging their affairs but dealing with the proposed changes? What is the rush? Why can it not be dated 1988 or 1989? There has been undue haste. In my view it will penalise those companies that are mainly trading companies. Therefore, I hope that my right hon. Friend will not only give sympathetic consideration to this but some assurance that something will be done to alleviate the unfairness in clauses 63 and 64.

§ Mr. Blair
I want to make one or two brief points about clause 63. I am advised that it stops a practice known as double dipping. I have not come across that term before, at least not in this context. Double dipping occurs when international groups of companies ensure that there is payment of taxation for both United Kingdom and United States purposes and then take relief in both countries. That is obviously wrong. I am also advised that the United States has effectively stopped the practice in respect of United States companies by introducing tax reform legislation that has been passed by Congress.
The amendment seeks to ensure that genuine trading losses can be surrendered to another group company. The hon. Member for Croydon, South (Sir William Clark), in moving his amendment, said that the clause does not simply prevent the type of practice that I have described, it actually prevents companies reclaiming the tax in the other country. I would be obliged if the Financial Secretary could say whether that is correct and whether that is the intended consequence of this legislation.
The hon. Gentleman drew attention to the function of the company. He asked why, if they are genuine trading companies, they should be within the provisions of the clause at all. My hesitation in supporting him is that it seems to me that the tax avoidance purpose and practice is not necessarily a function of the fact that they are trading companies or otherwise; it is the use of the group structure that gives rise to the tax avoidance where there is dual residence.
If tax avoidance is occurring on the scale that the Government believe, we are right to pass legislation to prevent that straight away. I would be obliged if the Financial Secretary would deal with those points and also, if it is the case that the United States has passed similar legislation, that there is a certain symmetry in the legislation that we are passing.

§ Mr. Norman Lamont
This is a highly technical and extremely complex area. I will look carefully at what my hon. Friend the Member for Croydon, South (Sir William Clark) has said. I intend to reply to that and, if other points arise, if necessary come back and report. I believe that his fears are somewhat misplaced. His amendments can be characterised in three groups. The first group—amendments Nos. 11, 12, 13 and 14—broadlyreflect a worry that the clauses may not fully provide for the 1190 exclusion of genuine trading companies that the Government are proposing. The clauses prevent a company that is resident in two countries and therefore able to obtain two lots of relief for the same loss, to obtain relief for that loss in the United Kingdom. A dual resident company that is not set up to create a tax loss, but which has taxable profits, is not affected by the legislation because it makes a profit. However, we recognise that the result may be harsh where a trading and profit-seeking dual resident happens to make a loss. Therefore, we intend that genuine trading companies should be outside the scope of the legislation.
The clauses are drafted to exclude such companies, but they are very tightly drawn to prevent abuse by companies that are not genuine trading companies. Genuine trading companies are excluded by clause 63(5) and (6). Clause 63(6)(a) makes it clear that a company whose trade is such that one of its main functions is to borrow, to purchase or to hold shares in another member of the multinational group, is treated as an investing company. Clause 63(6)(b) brings within the scope of the legislation any trading company which, although its main function does not include the activities covered by clause 63(6)(a), nevertheless in a particular accounting period carries on such activities for a purpose unrelated to the trade. Therefore, in substance clause 63(6)(b) makes it clear that where a trade other than trade within clause 63(6)(a) entails a financial activity such as the holding of investments or the payment of interest, it is only when those activities are disproportionate to the trade that the company will be caught by the legislation. This formulation was arrived at following detailed discussions with representative bodies and others.
The amendments proposed by my hon. Friend leave matters rather more vague. He relies on the undefined phrase "genuine trading companies". I fully understand his concern, but this is an area that has been exploited fully by the tax avoidance industry. We believe that it is necessary to be careful to ensure that only genuine trading companies are excluded. I hope that he will accept that I entirely recognise his concern and that he will accept my assurance that we do not intend and do not think that there will be a problem for genuine trading companies being excluded from the scope of the legislation.
The second group of amendments, Nos. 15 and 16. relate to clause 64. The general purpose of clause 64 is to prevent a dual resident investing company from sidestepping the denial of group relief provided for in clause 63 by using certain reliefs other than group relief in the United Kingdom, and, at the same time, continuing to obtain the equivalent of group relief in, say, the United States. It deals with a number of such reliefs in detail, and the amendments proposed by my hon. Friend draw attention to two of them.
Amendment No. 15 concerns the provision under which a trade that is transferred from one company to another without a change of ownership is treated as a continuing concern for all tax purposes, including capital allowances. The effect of the amendment is to allow all trading companies, and not just genuine trading companies, to continue to be treated in that way. I hope that my hon. Friend will accept my assurances that there should not be a problem for genuine dual resident trading companies.
Amendment No. 16 concerns the provision under which an asset can be transferred from one member of a 1191 group of companies to another member on a no-gain, no-loss basis. Again, genuine trading companies are outside the scope of clause 64 because they are not within the definition of "dual resident investing company". That is what the amendment is about.
My hon. Friend has tried to define "genuine trading company". We have defined "investing company" in various provisions of the legislation. A company that is not in the investing company category will be a genuine trading company. We consider that our approach and the particulars that we have listed are a better way of defining it rather than approaching the matter from another direction as my hon. Friend has tried to do by defining "genuine trading company". My hon. Friend's amendments do not succeed in that.
In any event, the abuse that the subsection attacks is the acquisition and sale of an asset by a dual resident investing company rather than its acquisition and retention. If anything were to be done to exclude assets retained from the legislation, it would be necessary to require the retention of the asset for a sufficiently long period to prevent abuse. That would obviously not be acceptable to my hon. Friend.
The third group of amendments, Nos. 58 and 59, are aimed at delaying the implementation of the legislation. In recent years, there has been a trend for more consultation and more warning to be given by the Government of impending legislation, to give those affected time in which to re-arrange their affairs. Dual resident companies will have to rearrange their affairs. That is absolutely inevitable. That is the answer to the point that my hon. Friend raised, in which the hon. Member for Sedgefield (Mr. Blair) was interested, about interest not being available even in the United Kingdom. It will be necessary for companies to re-arrange their affairs. We know the consequences of the legislation. Companies have been on notice of the proposed changes for quite some time. Absolutely nobody could claim that we have been precipitate. We had two periods of consultation; one in 1985 and one in 1986. In March 1985, we gave a clear warning that legislation was likely to be introduced if exploitation of the dual resident company loophole continued to grow.
As my hon. Friend knows—the hon. Member for Sedgefield alluded to it—legislation went through the United States Congress last year. Our legislation will take effect three months after the United States legislation. Some people say, "If you have United States legislation, why do you need United Kingdom legislation? What is the point of it? It is not necessary." Of course, if we did not have United Kingdom legislation in addition to United States legislation, the costs would fall entirely to the United Kingdom. If our legislation were delayed any further, we would bear the cost of relief for dual resident companies at no expense to the United States exchequer. A further year's delay would be costly and would simply encourage a further year's abuse.
My hon. Friend is concerned about genuine trading companies, but I hope that he will accept that there are many examples of dual resident companies being set up for no purpose other than to get an interest deduction in the two countries. I guess—I may be wrong—that that is by far the most common reason for setting up a dual resident company. That is not to say that there are no genuine 1192 trading companies. We intend that genuine trading companies should be excluded from the effects of the legislation.
I tried to explain to my hon. Friend the way in which we have approached the problem. It is an extremely technical area. I shall study carefully what he said. I believe that it is right to approach it from the definition of "investing company" rather than rely on the term "genuine trading company". I recognise that it will be necessary for companies to re-arrange their affairs to avoid the consequences that the hon. Gentleman raised. People have had notice of that change being likely for quite some time. From the representations and discussions that I have had with interested parties, I know that the major players in the business knew what was coming and could hardly have been surprised. I assure my hon. Friend that I shall examine what he said. I make no commitment, but if any action is necessary, of course we shall consider it.

§ Sir William Clark
I am grateful for my right hon. Friend's comprehensive reply. I understand his difficulty. He said that the matter is complicated, and everybody would agree. I shall certainly study Hansard tomorrow to get the full import and purport of what my right hon. Friend said. He kindly said that he would examine the matter again and, if necessary, come back on Report—of course, without any commitment. With his assurance that he has taken on board my various reservations, I beg to ask leave to withdraw the amendment.