'. In section 410 of the Taxes Act 1988 (group relief not available in certain cases including those where a person, either alone or with connected persons, controls 75% or more of the voting rights in a company owned by a consortium), in the definition of "connected persons" in subsection (5) after "in accordance with section 839" there shall be inserted "but as if subsection (7) of that section (persons acting together to control a company are connected) were omitted".'.—[Mr. Jack.]
§ Brought up, and read the First time.
§ Mr. Jack
I beg to move, That the clause be read a Second time.
I undertook to introduce the new clause in Committee in response to a new clause tabled by my hon. Friend the Member for Milton Keynes, South-West (Mr. Legg), to whom I am grateful for his assiduous efforts. The point that my hon. Friend and others have made to me concerned the genuine and potentially damaging uncertainty created among those considering whether to enter into joint ventures through consortium companies. Consortiums are an important and valuable business tool. That is reflected in the relief, similar to group relief, made available to certain consortiums. That relief must be protected by anti-avoidance rules.
The concern is that, following a Court of Appeal decision last year, one of those rules might deny relief solely because members of a consortium enter into a shareholders' or joint venture agreement as a normal part of their commercial activities. We have to take care here, because we are, after all, dealing with an anti-avoidance provision—which is why I could not accept my hon. Friend's new clause in Committee.
We have, however, found a way of removing the uncertainty from those entering these sorts of agreements without putting the Exchequer at additional risk. That is what the new clause does; I commend it to the House.
§ Mr. Barry Legg (Milton Keynes, South-West)
I am grateful to my right hon. Friend the Minister for introducing new clause 9 to deal with potential problems in respect of consortium relief. The new clause will deal 159 with the concerns that I sought to address with the new clause that I tabled in Committee. His efforts will help a number of major consortiums and their shareholders to ensure that their funds are effectively and properly used.
I should be grateful if my right hon. Friend could offer some guidance in respect of the position of consortiums and their shareholders during 1996. I understand that the amendment to the legislation will be effective from Royal Assent. Can he tell me whether, following the decision in Steele v. EVC International NV, the Inland Revenue is likely to interpret the existing legislation in a way that would prejudice the 1996 consortium relief claims that might arise under the bona fide commercial arrangements which he has now put in place? Can he also assure me that this relief will be available in 1997 and in the future?
§ Mr. Milburn
This important new clause is intended to clarify the rules governing consortium relief. Again, I am grateful to the Minister for alerting us to the background to the issue, which was raised in Committee by the hon. Member for Milton Keynes, South-West (Mr. Legg), who tabled his own new clause. At the time, the Minister expressed concern about that new clause being potentially open to abuse, and he gave a commitment in Committee that he would come back with a Government new clause. He has honoured that commitment today.
The new clause seeks to clear up the tax rules on consortium relief following the May 1996 Court of Appeal decision in the case of Steele v. EVC International NV which, by providing a wide definition of connected persons, effectively restricted group relief. Understandably, the court's decision has given rise to some concern among commercial organisations that enter into joint venture agreements. It is clear that such agreements are increasingly becoming par for the course: one thinks particularly of the role of consortiums in relation to private finance initiative projects, and one would expect the influence of such consortiums to increase in future. That pooling by companies—sometimes of very different backgrounds—of expertise and resources is a sensible way of proceeding and reflects the trend whereby the modern company does not try to provide all services by itself, but instead contracts in, buys out, or works together with other like-minded companies on a specific project.
To date, the tax treatment has been to offer participating companies tax relief on losses from the consortium company in which they hold shares according to the proportion of their shareholding in the consortium company. That sort of arrangement is especially important in the context of long-term and major infrastructure projects, which may involve considerable initial investment and, therefore, early losses. The Court of Appeal decision seemed to say that, where there was a means of participating companies' governing the policy of the joint venture company, they would lose their right to tax relief because they could be defined as connected persons. Existing tax rules prohibit relief where certain types of arrangements are entered into: for example, where someone and others—connected persons—are acting together to obtain at least 75 per cent. of the votes in the joint venture or consortium company.
160 The hon. Member for Milton Keynes, South-West said in Committee that some people in the City were advising companies not to enter into joint venture agreements, given the Court of Appeal ruling and the subsequent advice issued by the Inland Revenue in December 1996. I do not know to what extent that is happening, but, obviously, erecting significant new obstacles to legitimate commercial activity is a matter of very serious concern. I believe that the Minister has recognised the concerns, and proposes by means of the new clause to remove the uncertainty by eliminating the acting together rules from the particular arrangements test in which they are to be used.
I should be grateful if the Minister would clarify some important points about the operation of new clause 9. What is the object of the clause, and what arrangements will be regarded as outside the new criteria for gaining tax relief? In what regard does he believe the existing rules have proved so deficient that they have deterred potential joint venture arrangements? Obviously, it would be a matter of concern if important projects had been deterred in any way because of the operation of the rule, especially in the light of the Court of Appeal decision and the subsequent Revenue guidance in December 1996.
How long have the Government been aware of the deficiencies in the current rules? Have they responded to specific representations that have been made during the few months since the Court of Appeal judgment and the issue of the Inland Revenue guidance?
Perhaps the Minister will answer two significant points on the new clause when he replies to this short debate. First, can he give us an idea of the cost of the measure in a full year—has the Revenue gauged the implications for the Exchequer? Secondly, will he give some assurances that the changes to group relief structures will not result in new abuses? If we close loopholes to encourage productive investment, it is important that taxpayers receive an assurance that their interests are properly looked after.
§ Mr. Jack
The hon. Gentleman has posed me six questions, but I hope that he will forgive me if I respond first to my hon. Friend the Member for Milton Keynes, South-West (Mr. Legg), who asked a specific question. The change will have effect from the date of Royal Assent, but the Inland Revenue will not seek to argue that a shareholder agreement might prevent consortium relief on the ground of acting together for any open case.
The hon. Member for Darlington (Mr. Milburn) asked about the object of the new clause. I hope that my introductory remarks, and my comments in Committee, have shown what it is about. The new clause resulted from uncertainty created by the Steele v. EVC International NV judgment; we have sought to end that uncertainty.
The hon. Member for Darlington asked about the existing rules. I have made it clear that we wished, not to undermine the existing avoidance rules, but merely to clarify the operation of consortium relief in exactly the terms that he has used.
The hon. Member for Darlington asked how long we had been aware of deficiencies in the current rules. Following the decision in the Steele v. EVC International NV case, we received representations about whether that 161 form of acting together conflicted with consortium relief, and that effectively gave rise to the uncertainty that the hon. Gentleman expressed.
The Inland Revenue issued its tax bulletin in December 1996 to try to reassure those who had doubts following the Steele v. EVC International NV court decision, but that alone was not enough to provide reassurance, although in our view the position was clear. Matters were brought to a head when my hon. Friend the Member for Milton Keynes, South-West proposed his own legislative solution, which we subsequently refined into the new clause.
I cannot answer questions about cost. We have merely clarified the use of an existing relief. We are not creating any new opportunities; instead, we are merely allowing that which would normally have carried on within the existing curtilage of the law. We are not creating new opportunities. We are merely clarifying the operation of the existing relief.
I was asked, finally, whether these changes occasioned the opportunity for new abuses. With respect, that was why we targeted the new clause precisely so as to ensure that we hung on to the proper anti-avoidance measures that are part and parcel of the arrangements that we are discussing, but without disrupting the proper use of the consortium reliefs to which the hon. Gentleman and my hon. Friend have rightly attested.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.