EXEMPTION FROM CAPITAL GAINS TAX

HC Deb 09 May 2001 vol 368 cc180-5

'—. In section 271(1) of the Taxation of Chargeable Gains Act 1992 (concerning exemption from CGT) after subsection (j) insert— (k) any gain accruing to a UK resident company, or to a non-resident company chargeable to UK corporation tax under section 10 of this Act, in respect of the disposal of a substantial shareholding in a trading company or a member of a trading group. For the purposes of this subsection a substantial shareholding is a shareholding of 20% or more held for a period of a year or more.".'.—[Mr. Flight.]

Brought up, and read the First time.

Mr. Flight

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker

With this we may take new clause 4—Substantial shareholdings: deferral of capital gains tax—

`—In section 155 of the Taxation of Chargeable Gains Act 1992 (concerning classes of assets for roll-over relief) Class 9, after Head B, insert new subsection. Substantial shareholdings in trading companies or members of a trading group. For the purposes of this section, a substantial shareholding is a shareholding of 20 per cent. or more held for a period of a year or more.".'.

Mr. Flight

The two new clauses would provide alternative measures to complete the correction of the major mistake in the Government's original Budget proposals last year. The House will remember that the Chancellor came to the House with proposals to tax the offshore mixing companies used by multinationals based in Britain.

The original proposals would have made Britain one of the most unattractive places for multinationals to be based, whereas it has been, after Holland and the United States, one of the most attractive. They would have led, in due course, to companies setting up elsewhere and moving abroad, causing jobs and tax revenue to be lost.

Fortunately, after many—not only the Opposition but businesses and accountants—had spoken out against the proposals, the Government were forced to accept the objections and change their proposals. Last year's Finance Act corrected the error by introducing the practical and sensible arrangements for onshore pooling.

Dawn Primarolo

Did the hon. Gentleman agree with the mechanism of offshore pooling and the mixer companies that were used as holding companies to avoid tax in this country?

Mr. Flight

The Paymaster General is well aware that international businesses have been in discussion with the Inland Revenue for more than a year—quite sensibly, if that is what they thought they had achieved—to bring about onshore pooling arrangements. because they did not like having to use offshore mixers to achieve fair tax rates on their international earnings.

It was the need for onshore pooling arrangements, which did not then exist, that led to the use of offshore mixers. That usage was established and well known by the Revenue. It was a pity that when the issue was moving towards being satisfactorily resolved, the original Budget proposals did not pick up on that, but tried to be clever. Fortunately, the Government were eventually persuaded to see the light and change their line.

Dawn Primarolo

That was not the question that I asked the hon. Gentleman; I asked whether he was in favour of the use of mixer companies for offshore pooling. His party was in power for 18 years, and did nothing about it. Which does he favour: offshore mixing, which his Government presided over, or onshore mixing, which this Government have introduced?

Mr. Flight

The Paymaster General, who has played her role in this Government extremely competently, must surely accept that they have now been in power for four years, that we are coming up to another general election, and that what happened in the past is out of date. My answer is that probably, provided that the Government accept new clause 3 or 4, onshore pooling in its entirety is more desirable, because it is overt and within the control of the UK Government and tax authorities.

7.45 pm

The question of how to deal with the tax position of multinational companies has emerged over the years. There were far fewer multinational companies 20 years ago, and the idea of Britain being an important base for multinational companies has developed dramatically over the past 10 or 20 years.

Dawn Primarolo

rose—

Mr. Flight

If the hon. Lady is going to ask me why the Conservative Government did not introduce onshore pooling as an alternative to offshore mixers, my answer is that first, I personally was not a Member of the House at that time. and secondly, that we are now dealing with the present, not the past.

Dawn Primarolo

I entirely accept that Opposition Members were not brought up, as I was, to believe that we are all responsible for our past as well as for our present—[Interruption.] I am perfectly prepared to say that; it would appear that my past is scrutinised quite a lot by hon. Gentlemen.

The hon. Gentleman has Made the Government's [...] for us, because he has just said that in more than 18 years, the previous Government failed to see or act on the development of the new economy, and so did nothing about offshore pooling, which became an ever increasing problem. They did nothing about deferral or exemption, either. Perhaps he will tell us why.

Mr. Flight

The Paymaster General is being unnecessarily and rather ineffectively aggressive, in comparison with her normal behaviour. The issue is simple. The practice of using offshore mixers developed with the knowledge—indeed, to some extent with the collaboration—of the Inland Revenue over the past 10 years or so. However, its time had come: it was time to make a change and bring the arrangements onshore.

The fruits of the offshore mixers were beneficial to the United Kingdom, because they enabled us to collar much of the multinational capital business. They therefore acted in the national interest. However, the time had come to move the activity onshore. The two new clauses would complete that process fairly, and along the lines that, as I am sure the Paymaster General would be forced to agree, the Government undertook to follow during the debates on the Finance Bill last year.

Indeed, the hon. Lady herself has admitted that the Government have been consulting on the issue that the two new clauses address almost since that Finance Bill became the Finance Act last summer. I repeat that if they wish to achieve both fairness and a continuing competitive environment for multinational holding companies in the UK, the Government need choose only one of the two new clauses. The provisions are needed because holding companies will have to reshape themselves into a flatter structure than has typically prevailed under the old offshore mixer arrangements.

They will be moving from what was in effect a double tax relief regime to the new onshore pooling arrangements, under which the relevant holding company in the UK will be required to hold the international subsidiaries directly. New clause 3 would provide the route of exemption from capital gains tax when such a UK-based holding company reorganises its subsidiaries. In essence, it would make what had been a subsidiary of a subsidiary a direct subsidiary of the holding company. That probably represents the simplest and fairest solution to the problem, but we have also put forward an alternative in new clause 4, which would provide roll-over relief.

The amelioration of the tax position resulting from the Government's required restructuring from offshore to onshore pooling was promised by the Government as part of their package on double tax relief and controlled foreign companies. The Paymaster General herself has advised that the Government continue to consult on the matter. I suggest that it is now time to act, because the Government have had a year to consult on that important technical matter in the national interest. My hon. Friend the Member for West Dorset (Mr. Letwin) raised the issue in discussing clause 79 in Committee and she, while not promising to act, said:

The Government are consulting on changes to the tax on gains made by companies and disposals of substantial share holdings with a view to introducing either a deferral or an exemption."—[Official Report, Standing Committee A, 8 May 2001; c. 160.] The new clauses modestly request that the Paymaster General make a decision and tidy up the loose ends in the national interest and to complete the new arrangements for multinationals. If she chooses not to accept either new clause, I hope that she will give a firm undertaking that the issue will be addressed. A year's consultation is surely sufficient.

Dawn Primarolo

I am afraid that I must disappoint the hon. Gentleman. It will not surprise him to learn that should he press his new clauses to a Division, I shall ask my hon. Friends to oppose them. In all truth, he knows why that is a reasonable position in what is a complex area of taxation. I am sure that he will also accept that the Government, having set such a splendid record in the past four years in consultation on, and reform of, those complex areas, are aware that the question of whether deferral or exemption should be used is of considerable interest to business. We must ensure that our proposals are relevant to businesses today and will stand the test of time in a competitive and important sector of the economy.

I gently point out to the hon. Gentleman that his Government failed to address any of the issues before us. Organisations such as the Confederation of British Industry pressed for changes to be considered, but the previous Government failed to act. I understand their reluctance to act on a highly complicated area of taxation, but it is simply not true that this Government have failed to deal with the issue. Nor was it reasonable to expect that the Government should deal with it at the same time as the changes to double taxation relief. The hon. Gentleman was a member of the Finance Bill Committee last year as he was this, and he will know well that the double taxation relief changes were enormously complex and challenging, not only for Inland Revenue officials and businesses advising them, but for Members of Parliament. I cannot accept that at the same time as dealing with that highly complex legislation. we should have discussed a pick-and-mix choice between deferral and exemption.

Matters have moved on, to the considerable benefit of business, since the two issues of double taxation and deferral were linked in May 2000. In June 2000, the Government announced the double taxation rules allowing the onshore pooling that the hon. Gentleman mentioned. The pre-Budget report raised the possibility of an exemption as an alternative to a deferral of capital gains tax on the disposal of substantial share holdings. Businesses are very interested in that alternative, but they wish to see more work done on it.

The Government have made it clear, as I said on Second Reading, that we will introduce the changes in the 2002 Finance Bill. That is not that long to wait.

Mr. Flight

On a technical matter, will that timetable of dealing with the outstanding issue in the 2002 Finance Bill fit with the period required for restructuring to onshore pooling? If it does, and companies will not be left for a year in no man's land, that will be a satisfactory solution.

Dawn Primarolo

I rely on representations made to the Government in the consultation, but I am not aware that any company has claimed that its transactions will be affected and that the issue needs to be dealt with immediately. Businesses are saying that they want further consultation. Technical notes are being discussed in considerable detail. and the pre-Budget report made it clear that we are considering deferral or something better. The benefits of deferral have not been doubted.

The new clauses would encourage the Government to make legislation in haste. The hon. Gentleman wants us to pick one of his options, say, "That'll do", and add it to the Bill. I know that if we did, next year he would criticise the Government for poor drafting, even if it was his drafting. The matter is proceeding and we want to legislate in 2002, but we also want to ensure, through consultation with business, that our proposals will be a good fit now and help companies as well as standing the test of time. He will agree that our proposals must ensure, for example, that intellectual property rights are held here in the UK and that this is the most competitive place for businesses to be located, with the best environment for them to develop. If the hon. Gentleman agrees with those objectives, he should withdraw the new clause and await the outcome of consultation with business—something that he frequently implores the Government to do. In that way, we will achieve an agreed way forward, rather than a quick fix this year that will not work.

8pm

Mr. Flight

I briefly take issue with two things that the Paymaster General said at the beginning of her remarks. First, she boasted of the Government's splendid record of consultation with business on this matter, but I remind her of the outrage felt by business when the original proposals were introduced by the Chancellor. They caused business's love affair with the Labour party to fall apart. As I commented earlier, it is fortunate for the good of the country that the Government have changed their mind.

Secondly, the Paymaster General is not taking the point that, in the past, offshore mixers worked. They enabled the UK to do extremely well in the multinational headquarters business. The time had come for something better, but it was not the case that a nagging problem had not been addressed.

However, I was glad to hear the Paymaster General's response. I may have missed something in one of the earlier debates on this matter, but the seemed to say a little more than she did in Committee She did not respond completely to my main point—that businesses will have to restructure to move from offshore mixers to onshore pooling and that they must not be put in a void for a year while they wait for the issue to be resolved—but she went some way towards providing an answer to it.

The next Conservative Government will get on and deal with the matter. If that does not happen, the Paymaster General has promised that it will be dealt with in next year's Finance Bill. On that basis, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.