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Finance Bill

I shall try to explain why we have drafted schedule 8 in this way and, by extension, why the Opposition amendments are unacceptable. Amendment No. 26 is the key amendment. It changes the definition of an SME for the purposes of the exemption from the transfer-pricing rules in the Finance Act 2004. The same definition is also used in the new loan relationship party rules introduced by schedule 8. The exemption removes most SMEs from the requirement to apply transfer-pricing rules, including the relevant documentation requirements. The definition is used in existing legislation, and it is a standard European Commission definition that is used for many purposes, including for tax purposes. One of its features is that it groups an enterprise with other enterprises with which it is linked. That means that a company with a small turnover or a small number of employees that is a member of a group of companies with a large turnover or a large work force is not treated as a small enterprise and does not qualify for the exemption, which is the result that we want to achieve. Amendment No. 26 does not include any such grouping rule, which is a serious flaw that would allow a small UK subsidiary company within a giant multinational group to benefit from the exemption from transfer pricing rules, which would not be appropriate. The hon. Member for Cities of London and Westminster (Mr. Field) asked whether small companies controlled by private equity limited partnerships are eligible for the SME exemption. The principle is consistent, and I hope that it is clear: a business controlled by a private equity limited partnership will be treated in the same way as a business controlled by a company or by an individual, and the SME exemption will operate in exactly the same way as it does under existing transfer pricing rules, using a standard European definition to determine whether a company qualifies as a small enterprise or as a medium-sized enterprise. I must tell the hon. Members for Cities of London and Westminster and for Windsor (Adam Afriyie) that that definition is calibrated in euros and that it will continue to be calibrated in euros, although it makes the blood of the hon. Member for Windsor boil. The hon. Member for Cities of London and Westminster also asked what happens when debtors are no longer small or medium-sized enterprises. In that case, such enterprises lose their exemption from late-paid interest or discount rules. The exemption exists to encourage funding in SMEs, which are the businesses that are most likely to grow and to create jobs. The Government put a great deal of policy attention and support behind those businesses, often with the support of the Opposition. When such businesses are no longer SMEs, however, it is difficult to justify the continuation of that protection at the taxpayer’s expense. Those are the key reasons why I ask the hon. Member for Cities of London and Westminster to withdraw the amendment.