Comments from ACCA
ACCA is pleased to comment on the above consultation. We welcome the open, collaborative and constructive approach employed by HMRC and HMT in this consultation. In particular we applaud the decision to seek external input at a very early stage in the policy design process, and commend to policy makers the clear benefits that this approach has borne. HMRC and HMT have been able to produce draft legislation for wider consultation which meets their policy objectives while addressing the needs and for the most part wishes of the stakeholders. We welcome also the resistance on the part of HMRC and HMT to try to rush the process of what they recognise is important legislation for both the protection of the Exchequer and the business affairs of the taxpayers affected. The quality of the final legislation will be dependent upon the quality of the debate and the draughtsmanship brought to bear, neither of which benefit from undue haste.
ACCA believes that the proposals contained within the Consultation Document are for the most part a reasonable and proportionate response to the recognised shortcomings of the existing regime. We would welcome the extension of the principles applied to capital gains to the intangible assets regime, and regard the failure to incorporate such measures as the main weakness in the proposals. However we recognise that this is a “sin of omission” rather than commission, and remain supportive of the measures which have been put forward.
ACCA agrees that the proposed changes would deliver a closer alignment between tax and economic outcomes.
Although ACCA has not investigated in detail the technical issues of the legislation we should like to raise one area for clarification.
ACCA understands that the intention of the draft legislation on Company ceasing to member of a group is that the “no gain/no loss” provisions of s139 TCGA 1992 should apply to the charge arising under new s179 (3A). However we note that the application of s139 is dependent upon the demerging company receiving “no part of the consideration for the transfer”. This condition may not be met, as under new s179 (3C) there is reference to that company being treated as if consideration for the disposal is increased. The legislation needs to be clear that the deemed consideration arising under this section does not constitute “consideration” for the purposes of s139.
Capital losses after a change in ownership
Given that the government does not believe complete repeal of Sch 7A to be a viable option, ACCA does agree that the current proposals represent a worthwhile simplification of the rules. HMRC and HMT have made clear their concerns about the risk to the Exchequer, through over relaxation of the current restrictions, of creating a market in losses which were created under earlier rules at no real economic cost to their owners. While the retention of Sch7A will inevitably impose a burden on those groups which do have large pools of “legitimate” existing capital losses, we fully understand that HMRC will consider this to be the price paid by all for the misbehaviour of the few. ACCA hopes that those tax inspectors called up on to consider the treatment of such legitimate losses will be alive to the commercial considerations of business.
Value shifting and depreciatory transactions
ACCA broadly welcomes the proposed revisions to this currently mechanistic area of legislation. The move to a motive based anti avoidance rule should be welcomed by business as it relieves compliant taxpayers of the burden of interpreting and complying with the current complex series of provisions contained in ss 31-34 TCGA 1992.
The proposed draft legislation is commendably brief and follows a recognised formula for identifying tax advantages considered to be abusive by the authorities. It is important for the efficient operation of any such legislation that both taxpayers and HMRC have a clear understanding of what is understood to be a “tax advantage” in the particular circumstances targeted by the rule. HMRC should therefore provide clear guidance covering for example situations where the structure of the transaction includes the settlement of other liabilities, such as intra or inter group borrowings and trade receivables, in parallel with the principal disposal.
ACCA welcomes the move to assimilate the exit charge on potentially unrealised and untaxed gains with the exemption under SSE. Although this will require a degree of further complication to address situations where the charge might arise in the absence of an SSE type transaction, the vast majority of instances where a degrouping charge might otherwise be an issue will be dealt with. This will offer a significant reduction in due diligence and structuring costs for groups contemplating acquisitions and disposals.
The proposed revisions to the old “associated companies” rule are clear. ACCA does however regret that the new clear test is so restrictive. For many groups, the requirement for the structure to remain static throughout the whole period between the original acquisition and the subsequent degrouping will be unduly onerous and will not reflect the commercial reality of how they operate. While clarity makes the exception more useful to business, the restricted scope more than offsets that benefit.
The proposed “backstop rule” is a welcome addition to the draft legislation. ACCA hopes that the restricted grounds for consideration of claims in draft s179ZA (5) can be interpreted broadly so as to offer maximum flexibility to companies and tax inspectors without opening the floodgates to unwarranted or overly complex claims.
ACCA believes that outdated laws should be removed, and that each tax law should exist only in response to a direct need for it. As the new charge under s179 (3C) should operate to change the gain on business assets into a gain on disposal of shares, there appears to be no need to retain the facility to rollover the gain on business assets. However, s179 (3) effects a deemed disposal and reacquisition where a company leaves a group other then on disposal of shares (for example issue of new shares to a third party, reducing the current group parent’s holding below 75%). In these circumstances, the ability to defer the tax charge should be retained. ACCA does not therefore believe that the provisions of s179A, 179B and Sch 7AB should be repealed without further consideration of the impact on groups where members cease to meet the qualifying conditions other than by disposal of shares.