INVESTMENT COMPANIES AND TRADING COMPANIES (Hansard, 3 July 2002)

§ Mr. Flight
I beg to move, That the clause be read a Second time.
The clause is another Chartered Institute of Taxation proposal, which raises an issue of rather greater fundamental importance. For many years, the tax law has contained an in-built and assumed bias against investment companies. There are many provisions in which privileges given to trading companies are not available to investment companies. In simple terms, the tax code operates on the basis of trading: good; investment: bad. The distinction is much less appropriate now than it may have been in the past.

§ Paul Flynn (Newport, West)
It may be helpful to the House if the hon. Gentleman explained to us whether he intends to withdraw all the new clauses that he is moving, and which he admits are more suitable for discussion in Committee than in the House. Is his refusal to press them to a Division intended to disguise the fact that there are only two Tories in the Chamber?

§ Mr. Flight
I am disappointed that such an able Member of Parliament should raise an entirely spurious point. The clauses were intended to be dealt with in Committee. The Committee's obsession with some other territory—I forget what, specifically—meant that we ran out of time. They are part of an agenda to try to simplify our tax system. It is right and proper that they should be put on the record. I assure the hon. Gentleman that I would prefer to be home in my bed and doing my duty, so I shall waste no more time.

§ Rob Marris
Having driven home in a big car?

§ Mr. Flight
No, a little car—a little Clio.
The distinction between investment and trading is out of date, and the clause seeks to probe the subject in one specific area, rather than attempting to change the whole tax system. Specifically, it focuses on the distinction within the capital gains tax tapering relief rules. That has been chosen as there have already been changes in the legislation in that area.
There is a much better taper for business assets than for non-business assets. Business assets are carefully defined and include trading activities, investments in unquoted trading companies and employee investments in their employing company in all cases. In respect of the latter point, there has been a modest development in the investment trading rules, with the changes in the Finance Act 2001 to extend employee shareholding to situations where the individual works for an investment company. It is suggested that that shows that the Revenue and the Government have recognised the underlying point of principle that we raise.
354 Surely the focus now should be on active companies versus passive companies. In such a situation, there may well be a legitimate reason to protect the Exchequer against manoeuvres by individuals holding private investments through passive company corporate shells. It is suggested that all companies should qualify for the enhanced taper relief that is on offer for trading companies, but there should be a restriction against private investment companies.
The definition in the clause is an attempt to prevent the private investor from trying to manipulate the tax rules, although even here there would be an argument for not preventing such a person taking advantage, if they were so minded. It would mean that any investments held through a corporate shell would pay capital gains tax twice—within the company and again when the individual sells the shares in the company—rather than once for a direct holding. Any advantage gained through the increased tapering at one level would be negated to all intents and purposes at other levels.
The impact of the change would be limited. It would simply open up to the higher taper relief a number of investments by individuals in unquoted investment companies that were of a significant size. The crux of the matter and the reason for the clause is to allow a probe into the rationale for the continuing distinction. In this day and age, surely the aim should be to encourage all active businesses, and if there is a need to discriminate against certain businesses, to do that in as limited a way as possible.

§ Ruth Kelly
I am afraid that I cannot support new clause 12. It aims to allow shares and securities in non-trading companies to qualify as business assets for capital gains tax taper relief on the same footing as shares and securities in trading companies. That would mean that shares in an unlisted non-trading company, such as a property investment company, would qualify for business assets taper relief. There would be no distinction between trading and non-trading companies.
I should remind the House why we have this distinction between trading and non-trading companies for taper relief. Business asset taper relief supports productivity improvements by focusing on trading companies. There is a long-standing view that productivity gains are likely to be greater in trading companies, such as manufacturers, than in investment companies, such as property landlords.
That is not to say that the Government do not recognise that a range of investment companies could contribute positively to the UK economy. That is why we announced in the Budget that there would be consultation on further reforms of the corporate tax system, including a review of the scope for greater alignment between the treatment of investment and trading companies. A consultation document will be issued later in the summer. The outcome of that review will have implications for other parts of the tax system in addition to how companies are taxed. One such area could be the capital gains tax treatment of shares in companies.
That is also why we announced in the Budget that we shall continue to review the case for further changes to the non-business asset capital gains tax regime for taper relief. However, we need to be persuaded of the case for change in those areas by evidence of economic benefit and value for money. Without evidence, the new clause seems premature.
355 Until we know the outcome of the two reviews that we are carrying out, we believe that the distinction between trading and non-trading companies should remain as it is for taper relief purposes. The introduction of new clause 12 would create fresh tensions at the margins by moving the boundary between qualifying and non-qualifying companies. Therefore, I must ask the House to reject the new clause.

§ Mr. Flight
I am glad to hear that the Minister has established processes to examine this territory to try to make sensible modernising reforms. She knows that the CIOT is not seeking beneficial tax avoidance schemes, but rather the modernisation of our tax regime. I trust that whatever makes sense in this area will be advanced in due course. I still think that active versus passive will become the main difference for the future. On the basis of what the Minister has said, I beg to ask leave to withdraw the motion.

§ Paul Flynn
No.