Subsection (10) of section sixteen of the Finance Act, 1954 (which defines "new" in relation to machinery and plant for the purposes of investment allowances as meaning unused and not secondhand) shall be amended by the addition of the following proviso:—
Provided that after the seventh day of April, nineteen hundred and fifty-nine, a ship shall not be deemed to be secondhand by reason only of the fact that capital expenditure on the provision of the ship or part thereof was incurred by a person to whom no investment allowance was made or due in respect of that expenditure."—[Mr. J. Howard.]
§ Brought up, and read the First time.
§ Mr. John Howard (Southampton, Test)
I beg to move, That the Clause be read a Second time.
The Clause amends Section 16 (10) of the Finance Act, 1954, which reads:In this section, 'new' in relation to plant and machinery means unused and not secondhand.The provisions of the Clause are intended to relate entirely to ships and not to plant and machinery in general.
The shipping industry is faced with a riddle, which it must solve. The riddle is: when is an unused ship a new ship, and when is it a secondhand ship? On the answer to that riddle depends the question whether or not a shipowner is entitled to an investment allowance. The Committee will know that it sometimes happens that a ship changes hands whilst on the stocks, in the shipyard, and an anomaly has arisen in the application of investment allowances under different types of building contracts.
The Committee will recall that special treatment has been given to the shipping industry in relation to investment allowances, with the object of providing more 192 new ships for the British merchant navy. Investment allowances on new ships are an important factor in deciding when a new ship is a commercial proposition at a particular price and when it is not, but in order that an unused ship may be a new ship it must clearly fall within the provisions of Section 16 (10) of the Finance Act, 1954.
I understand that there are two ways in which a United Kingdom shipowner may acquire an unused ship. In the first place he can put a contract to the shipyard for a ship, pay the instalments as they become due, and claim the investment allowance on each instalment. That is the conventional type of contract.
There is a second type of contract which is being increasingly used. Under this type, a shipowner places a shipbuilding contract in which the property in the ship does not pass from the shipbuilder to the shipowner until the vessel is actually delivered. Under this type of contract, the shipowner receives a provisional investment allowance only on each building instalment as he passes it over to the shipbuilder, and the investment allowance becomes absolute when the shipowner accepts delivery on completion of the vessel. That is somewhat analogous to the hire-purchase contract in other matters, and, for simplicity, I propose to call this the hire-purchase type of contract.
Under both forms of contract, the ultimate owner may change from time to time. In other words, a ship may be sold after it has been laid down and before it has been completed. In the first type of contract, the conventional contract, a United Kingdom shipowner acquiring a ship during the course of construction from another United Kingdom shipowner who placed the first contract receives the investment allowance on those instalments he actually pays to the shipbuilder after acquiring the title to the vessel, the first shipowner having already received investment allowances on the instalments he has paid up to the date of the sale. No investment allowance is granted to the second shipowner in respect of the sum he pays for the benefit of the transfer of the contract because the Inland Revenue regards the situation, technically, as one in which the partially completed ship is a secondhand ship. In other words, although it is unused, it was in somebody else's 193 possession before the shipowner who owned it at the stage of launching completed his part of the contract.
It is customary, therefore, when a price is fixed between the first shipowner and the second or subsequent shipowner, to adjust the price at which the contract changes hands in order to take account of the investment allowance which the man who placed the contract received.
If a United Kingdom shipowner acquires a partially completed ship under construction for a foreign owner under the conventional type of contract, he still receives the investment allowances on the instalments he pays after acquiring the contract from the foreign owner, but he is, of course, unable to obtain any form of allowance for the investment allowances which would normally have been available on the earlier instalments because the foreign owner does not pay British Income Tax and, therefore, is not entitled to any investment allowance, and, indeed, because the ship was, at the stage of transfer secondhand. Nor can he secure—and herein lies the point of the new Clause—any adjustment in price to take account of the investment allowance similar to the adjustment a shipowner would be allowed under the conventional type of contract had he taken a transfer from a United Kingdom shipowner, again because we have this difficulty about the foreign owner not paying British Income Tax.
However, should the first United Kingdom shipowner buy a similar vessel in precisely the same state from the same foreign owner but, this time, under the hire purchase type of building contract, the United Kingdom owner would receive the investment allowance not only on the instalments which he pays after acquiring the contract but also on the price he pays to the foreign owner for the transfer of the ship-building contract, thus obtaining investment allowance on the whole cost of buying the vessel. The vessel is not second-hand, because it is still in the possession of the shipbuilder and only after completion and on delivery is it transferred.
Thus, we have two identical ships both bought from a foreign owner who placed the original contracts. One ship being built under a hire-purchase type of contract carries investment allowance 194 on the whole cost to the United Kingdom shipowner, and the other being built under the conventional contract carries the investment allowance only on the final instalments, leaving part of the cost relating to the unused, partially completed but second-hand ship outside the scope of relief through the investment allowance.
I need hardly remind the Committee that this can be a very great disadvantage financially, which becomes greater as the date of the purchase of the contract comes closer to the date of completion. It might well be the major factor in deciding a United Kingdom shipowner against adding a ship to the British merchant fleet. It is a negation of the aim which the investment allowance is intended to achieve.
I do not propose to weary the Committee with references to the advantages of adding to the British merchant fleet, but I am sure the Committee will be with me when I say that the British shipowner who under current conditions is prepared to add a ship to his own fleet and to the British merchant fleet should be encouraged and that this anomaly should be removed. This modest Clause, which seeks to rectify the anomaly, would allow more ships to be added to the British fleet and its existence has already prevented certain ships from being acquired for Britain.
§ Mr. Douglas Marshall (Bodmin)
I wish to support what has been said by my hon. Friend the Member for Southampton, Test (Mr. J. Howard). This is a very complicated Clause which he has explained clearly to the Committee, and I hope that the Government will view it sympathetically. Investment allowances have been allowed for shipping from time to time primarily in order that the fleet may be modernised. It is also important that our mercantile marine should be enlarged and wear the "Red Duster." This Clause will help in that direction. With a world recession in trade it is difficult to help the shipping industry, but the acceptance of this Clause by the Government would help to enlarge the British mercantile marine.
§ Mr. Mitchison
There is much in the points which have been advanced in favour of this Clause, but there are two questions which I wish to put. Tonight 195 we have heard a great deal about Conservative principles. We on this side of the Committee are always interested to discover what they are, if there are any, and we should like to know what is the attitude of the Government or the Conservative Party, whichever way it is put, regarding retrospective legislation in favour of the subject. This appears to be in favour of the subject, and it is clearly retrospective to 7th April, 1959. I ask that the Government give a clear definition, which we hope will hold good for some time, of what are the Conservative principles regarding the question of retrospective legislation. If they could add a word about their practical application, it would be useful.
My second question is this. A ship is to be deemed to be secondhand by reason of the fact mentioned in the proviso which was clearly explained by the hon. Member for Southampton, Test (Mr. J. Howard). But it would not be deemed to be secondhand by reason only of that. In what circumstances is it secondhand and in what circumstances is it deemed to be secondhand? This is a negative, limited and rather curious proviso, and while we can see the negative side, we should not mind seeing the positive side too, and since it is late at night, that last remark applies to Conservative policy generally.
§ 11.30 p.m.
§ Mr. Simon
My hon. Friend the Member for Southampton, Test (Mr. J. Howard) very clearly described what the new Clause seeks to do. Shipbuilding contracts, as I understand it, normally provide for payment by instalments, and they fall into two types. In the first category, type A, the property in the ship under construction passes to the prospective owner as the instalments are paid. In the second case, type B, which my hon. Friend called the hire-purchase contract, no property passes until the final payment for the ship is made. A ship may pass in ownership while it is still under construction, and it may pass from a foreign owner to a British owner or from a British owner to a British owner.
Therefore, we have four types of case. The first is where both owners are subject to United Kingdom Income Tax, and we have the first type of contract, 196 where the property passes as the instalments are paid. There the second owner gets the full benefit of the investment allowances indirectly through the price in the way described my my hon. Friend.
The second case is where both owners are again liable to United Kingdom Income Tax, and it is the second type of contract, where the property passes only on the payment of the final instalment. There again, the second owner gets the full benefit of the investment allowances, because the investment allowances are disallowed to the first owner and credited in full to the second owner.
The next group of cases is where the first owner is not subject to United Kingdom Income Tax. With the second type of contract, type B, where the property passes only when the last instalment is paid, the second owner gets the full benefit of the investment allowances exactly as he would on purchase from a United Kingdom owner.
But in the fourth type of case he does not. He will get only part of the allowances. My hon. Friend is entitled to say that that is an anomaly which enures to the disadvantage of anybody purchasing a ship for our Mercantile Marine.
Unfortunately—for the reason touched upon by the hon. and learned Member for Kettering (Mr. Mitchison)—I do not think the new Clause meets the case which my hon. Friend desires to meet. It says:… a ship shall not be deemed to be secondhand by reason only of the fact that capital expenditure …and so on. But a ship is, in fact, secondhand irrespective of that fact. In other words, the new Clause has no effect on whether it should be considered to be secondhand or not for the purpose of the tax law, and that is because "new" is defined under the existing law as "unused and not secondhand." Therefore, one must give a different meaning to "not secondhand" from "unused." Consequently, "secondhand" can mean only that it has passed from one owner to another. I do not know whether I have made the point clear to my hon. Friend.
I am, therefore, bound to say that the Clause does not effect what my hon. Friend seeks to do. But my right hon. Friend would like to consider the 197 matter further before the Report stage. Without giving any specific undertaking, perhaps I can say that we have been impressed by the point put forward by my hon. Friend. I should like to examine it further to see whether there will be any interests which would be adversely affected. If everything is as indicated by my hon. Friend, we can perhaps ourselves then put down a Clause in the correct form on Report.
In view of that, perhaps the hon. and learned Member for Kettering will excuse me from further defining Conservative principles.
Mr. H. Wilson
Before the hon. and learned Gentleman leaves that point, may I ask this question? When the Chancellor does put down a Clause on Report to deal with the rather serious anomalies, from what date is the Clause likely to operate?
That would be most natural and appropriate, but after all that the hon. and learned Gentleman said last week on the subject of retrospective legislation, I am surprised that he even wants time to consider this point. If he meant what he said last week, there can be only one answer to the question which my hon. and learned Friend and I have put to him.
§ Mr. Frederick Willey (Sunderland, North)
The hon. Member for Southampton, Test (Mr. J. Howard) and the Financial Secretary have spoken with such lucidity that I have had some difficulty in fully comprehending the discussion.
I am sure that had the hon. Member for Sunderland, South (Mr. P. Williams) been here, he would have joined me in thanking the hon. Gentleman for calling the attention of the Committee to this anomaly. I gather from the Financial Secretary that the important contribution that he made was to appear sympathetic to the removal of this anomaly. As one who represents one of the major shipbuilding towns in the world, I am obliged for this small concession. But as this matter is to be considered further by the Chancellor, whom we recognise as an able seaman, we hope that he will 198 not only discuss this anomaly but will seriously discuss with the Ministry of Transport the general issue facing British shipping at the moment.
This matter is causing a great deal of anxiety amongst shipbuilders. Therefore, in thanking the Financial Secretary for what he said, I hope the Chancellor will take the opportunity of looking at the broader question of the difficulties which British shipping is facing at the moment, efficient though it is. These difficulties are bearing heavily upon the shipbuilding industry.
I hope that not only will this anomaly be removed but that we will shortly have a statement from the Government to the effect that they are seriously seized of the present difficulties facing the industry.
§ Mr. Stanley McMaster (Belfast, East)
The matter has been very well put by my hon. Friend the Member for Southampton, Test (Mr. J. Howard), but I would urge the Chancellor, when he considers drafting a new Clause, to consider making it retrospective to 7th April. The shipbuilding industry, which is extremely important to the country, faces very stiff opposition from shipowners flying flags of convenience. Therefore, I would urge the Chancellor to pre-date the Clause to 7th April.
§ Mr. J. Howard
In view of the complication of this proposed new Clause and my hon. and learned Friend's assurance that the matter will be considered on Report, I beg to ask leave to withdraw the Motion.
§ Motion and Clause, by leave, withdrawn.
Mr. H. Wilson
On a point of order, Sir Charles. The proposed new Clause entitled "Exemption from estate duty of money passing to certain galleries, museums, &c." is another of the Clauses which we propose not to move, and we hope to table it on Report.