§ Mr. Flight
I beg to move amendment No. 155, in page 77, line 11, leave out clause 106.
This is a probing amendment. We have been approached by the Chartered Institute of Taxation and the Law Society, which are still concerned about the wide scope of the wording of proposed new section 135A of the Finance Act 1993. In their opinion, the new provision is still capable of catching many companies that prepare their accounts in foreign currency for perfectly normal, commercial reasons rather than because of tax factors.
Both organisations expressed the concern that the test remains an expected main benefit test as opposed to a purpose test. The question posed is what is the main benefit that might be expected to accrue from exchange gains having to be computed for tax purposes by reference to a particular currency, rather than the relevant question as to what is the main benefit that might be expected to accrue from drawing up commercial accounts in a particular currency. The expected benefits of a transaction is the expected result, whereas a purpose test is a motive test.
A company's motive in choosing to use a particular reporting currency might have been to avoid exchange fluctuations where the majority of its assets or liabilities are denominated in that currency, but, applying the proposed new section 135A, it may be possible to conclude that the expected main benefit of using the currency was that the company would avoid realising an exchange gain under the foreign exchange legislation.
The key concerns about this anti-avoidance provision are whether wider commercial factors can be taken into account and at which time the expected main benefit test is to be applied. Those issues exercised the institute and the Law Society; both expressed concern that the new test could catch a large number of the investment companies that the reforms in clauses 106 and 107 are introduced to assist.
Will the Minister offer assurances that commercial factors can be taken into account, and that the expected benefit is to be judged at the time when a company first prepares its accounts in foreign currency? Will she also confirm that the provisions of the section will not apply when a company is preparing its accounts in foreign currency, in accordance with normal accounting practice, in order to avoid its results being distorted by exchange rate fluctuations? The current provisions are widely drawn, and it would be most welcome and helpful if the Minister would give us a clear statement on the cases to which the anti-avoidance provision might be applied.
§ Dawn Primarolo
The amendment would remove clause 106. That clause contains several provisions to 479 support changes introduced by clause 105 to improve the tax system for international companies. Those changes have been widely welcomed because they will make the United Kingdom a more attractive base for international companies.
As those supporting measures are necessary to enable the new system to fit in with the existing law, I realise that the Opposition's attempt to drop the whole clause is not serious. Indeed, the hon. Member for Arundel and South Downs (Mr. Flight) admitted that the amendment is a probing one, and that the real concern is about the part of clause 106 that deals with the new anti-avoidance measures in the clause: the new section 135A of the Finance Act 1993, designed to stop the new rules established under clause 105 being exploited to avoid tax.
As the hon. Gentleman knows, the effect of section 135A is to undo the application of the new rules where the main benefit that might be expected to accrue to a company from using a particular currency in its accounts is that a taxable currency gain would not be recognised. In Committee, the Government made it clear that the rule will apply only where net exchange gains would be cancelled out. That demonstrates that we are interested in the overall position of the company and not in the effect of individual transactions considered in isolation.
The hon. Gentleman continues to express concerns about the scope of the rule, however, so I shall try to reassure him with some comments that I prepared earlier—as they say on "Blue Peter". These comments will also cover points of interest to others who read our proceedings.
Let me emphasise first that the new rule is intended to catch avoidance. It is not aimed at any particular type of company or business, but seeks to ensure that the new system of calculating tax, based on a company's accounts, cannot be abused to avoid tax. So trading companies and investment companies conducting their business in a normal, commercial way will not be affected. The point of the test is to establish whether the main benefit that might be expected to accrue to a company from the structuring and accounting of assets and liabilities in a particular currency is that a net exchange gain would be avoided.
The wording of the test allows for commercial considerations to be taken into account. For example, even if the currency adopted in the company's accounts was particularly weak or strong, if it made commercial sense to use that particular currency and the company's assets and liabilities in that currency were broadly matched, no net exchange gains would have been expected to have been avoided, and the section would not apply.
Where a net gain has been avoided, the test would still be whether the main benefit from using the currency was the furtherance of the commercial purposes of the company or the avoidance of that exchange gain. The Government believe that a company will normally be able to judge whether it would pass or fail this test. In particular, a company will know whether the decision to account in a particular currency makes commercial sense or whether the structuring and accounting of the company's affairs has been skewed to avoid generating taxable exchange gains.
480 To conclude, let me reiterate that the new rule is intended to tackle avoidance. It will not affect legitimate business undertaken by any company, whether that company is a trading company or an investment company. However, it will affect companies that aim to exploit the new rules for a tax benefit.
I hope that those remarks clarify the scope of the provision and give the hon. Gentleman some of the reassurances that he and others seek on the implementation of the clause. The Inland Revenue will also be providing some written guidance on how the provision will be applied. Given this clarification, perhaps the hon. Gentleman will now feel able to withdraw his amendment. It is only regrettable that we did not have an opportunity to cover these points more fully in Committee.
§ Mr. Flight
I thank the Paymaster General for her helpful comments. I beg to ask leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.