Companies (Hansard, 15 November 1991)

§ Mr. Maude

There are various tax provisions which treat a group of companies as if it were a single company. Two weaknesses in the legislation have come to light where tax benefits could be enjoyed by companies in a way that does not properly reflect commercial reality. We intend to introduce provisions in the next Finance Bill to correct these defects.

The first point concerns circumstances in which there are "arrangements" in existence in respect of shares and whether they are taken into account in determining whether a group of consortium relationship exists between two companies. This issue was considered in the case of J. Sainsbury plc v. O'Connor in which judgment was given by the Court of Appeal earlier this year. The effect of that judgment was that, for the purposes of the provisions of schedule 18 to the Income and Corporation Taxes Act 1988 about one company's entitlement to profits and assets of another, share "arrangements" mean arrangements to vary rights attaching to particular shares but not, as the Inland Revenue had previously thought, arrangements involving changes in the ownership of shares. The legislation we propose introducing will extend the definition of arrangements to cover cases where arrangements exist for the whole or part of a company's holding of shares or securities to be disposed of to, or otherwise effectively reduced in favour of, another party. This is the way the Inland Revenue used to interpret the law. The new legislation will, if passed by Parliament, take effect for arrangements which come into existence on or after today.

The second point concerns the transfer of assets between companies in the same group. When this happens, any capital gain is generally deferred. When a company leaves a group still holding an asset on which gains have been deferred, a charge can be raised to recover the tax on the deferred gains. But when a company leaves a group in 708W the course of the winding up of another group member, the company may be able to benefit from a defect in the law and avoid paying tax on those deferred gains. The legislation correcting this defect will, if passed by Parliament, also take effect where a company leaves a group on or after today.

The Inland Revenue will consult interested parties about the details of both aspects of this new legislation. We intend to publish draft clauses to help those consultations. Further details are in a press release issued today by the Inland Revenue.