Brought up, and read the First time.
I beg to move, That the clause be read a Second time.This is a technical proposal to sort out a continuing anomaly from the Finance Act 1996, and is designed particularly to sort out some problems for PFI companies. PFI companies can account for the cost of construction assets for the public sector as either fixed assets or financial assets depending on the interpretation and application of financial reporting standard 5, application note F. The corporate tax treatment does not always follow the accounting treatment and, with either accounting treatment, the cost of construction can be taxed on a capital basis. The current loan relationship legislation under the 1996 Act provides that where interest is capitalised into a fixed asset for accounting purposes, a corporate tax deduction can be taken in the accounting period in which the interest is incurred. Where interest is capitalised into a financial asset, the Revenue's view is that the corporate tax deduction should be spread over the life of the asset, with the profile of the deductions following the write-down of the asset in the balance sheet. The tax deduction will not be taken at a time when there is an equivalent debit to the profit and loss account and does not follow the accounting treatment. The pricing of PFI contracts takes into account the time value of money. An interest deduction is worth more and will reduce the price to the public sector if it is available sooner rather than later. Many PFI companies have priced on that basis. The current rules prejudice companies that account for the construction costs as a financial asset. New clause 2 is designed to correct this anomaly, providing that the timing of the deduction for capitalised interest is not dependent upon the interpretation of accounting guidelines. The new clause amends the loan relationship legislation as enacted by the Finance Act 1996.
I am a little surprised that the hon. Gentleman is still pushing this new clause, particularly as I understand that it was prompted by a practitioner group seeking clarification of the operation of the existing legislation. That clarification has been provided and accepted by that group. The new clause is unnecessary. I shall ask the House to reject it, but I should briefly explain the position regarding existing legislation. The practitioner groups to which the hon. Gentleman has referred have accepted the guidance from the Revenue.The new clause provides for an interest deduction to be allowed to a company when that interest is accrued, even though the interest may not be debited to the company's profit and loss account. That can occur quite properly in accordance with the UK generally accepted accounting practice as part of the capitalisation of the construction costs of a major capital project. The new clause is intended to ensure that where interest and associated construction costs are accounted for as financial assets, the interest costs can be deducted for tax purposes as they accrue. The new clause is unnecessary. The loan relationships legislation in the Finance Act 1996 already provides for capitalised interest to be deducted as it accrues despite not having been taken into the profit and loss account. As I said, I understood that the new clause, tabled some weeks ago, was related to clarification for particular practitioner groups. Following the tabling of the new clause, constructive dialogue took place between the Revenue and the external representatives of the head office, PFI contracts group. I am sorry that the hon. Gentleman has not been informed that that reassured the group that existing legislation already provides the certainty that it requires—specifically, that the Revenue accepts that, where a PFI property is a fixed asset for tax purposes, it will fall within the definition of a fixed capital project in paragraph 14 of schedule 9 of the Finance Act 1996. That ensures that relief for interest is properly given as it accrues. The Revenue has confirmed the provision and will confirm it again in new guidance in the very near future. I ask my hon. Friends to vote against the new clause, should it be put to the vote. It is unnecessary because the current legislation is quite clear.
I am grateful for the Paymaster General's comments, which had not been relayed to me. The briefing behind the new clause was not the group to which she referred. As it appears that the Government picked up the point from the new clause that we tabled, it would have been helpful if the Government could have advised us. However, on the basis that the problem has been dealt with, I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.