|(1) This section applies to a loan to an individual to defray money applied—|
|(a) in acquiring any part of the ordinary share capital of a close company within subsection (2) below, or|
|5||(b) in lending money to such a close company which is used wholly and exclusively for the purposes of the business of the company or of any associated company (being a close company within subsection (2) below) of the company, or|
|(c) in paying off another loan where relief could have been obtained under this section for interest on that other loan if it had not been paid off (and, if free of interest, assuming it carried interest).|
|10||(2) Subsection (1) above applies to a close company—|
|(a) if it is a trading company, or|
|(b) if it is a member of a trading group, or|
|(c) if the whole, or substantially the whole, of its income is of one or more of the following descriptions, that is—|
|15||(i) estate or trading income, or|
|(ii) interest and dividends or other distributions received from a subsidiary which is it self within paragraph (a), (b) or (c) of this subsection.|
|(3) Relief shall be given in respect of any payment of the interest by the individual on the loan—|
|20||(a) if when the interest is paid he has a material interest in the company, and|
|(b) if, taking the period from the application of the proceeds of the loan until the interest was paid as a whole, he has worked for the greater part of his time in the actual management or conduct of the business of the company, or of any associated company of the company, and|
|25||(c) if he shows that in that period he has not recovered any capital from the close company, apart from any amount taken into account under the next following subsection.|
|30||(4) If at any time after the application of the proceeds of the loan the individual has recovered any amount of capital from the close company without using that amount in repayment of the loan, he shall be treated for the purposes of this section as if he had at that time repaid that amount out of the loan, and so that out of the interest otherwise eligible for relief and payable for any period after that time there shall be deducted an amount equal to interest on the amount of capital so recovered.|
|35||If under the following provisions of this Act this section applies to a loan part only of which fulfils the conditions in this section, so as to afford relief for interest on that part, the deduction to be made under this subsection shall be made wholly out of interest on that part.|
§ which I do not think the Chancellor would approve.
§ Mr. Speaker
Order. I had noted that the name of the hon. Member for Windsor (Sir C. Mott-Radclyffe) and that of the Chancellor were down for what seemed to be an all-party new Clause. I thought that the age of miracles had come, but apparently it has not. The correction will be duly made, and the embarrassment to both the hon. Gentleman and the right hon. Gentleman will be removed. The Chancellor of the Exchequer, to move his Motion.
That on Consideration of the Finance Bill any Amendments to the Schedules shall be considered after the Amendments to the Clauses to which those Schedules relate, in the order in which those Clauses and Schedules were considered by the Standing Committee on the Bill, and that Amendments to Schedule 6 (which was committed to a Committee of the whole House) be considered after Amendments to Schedule 5.—[Mr. Roy Jenkins.]
|(5) The individual shall be treated as having recovered an amount of capital from the close company if—|
|40||(a) he receives consideration of that amount or value for the sale of any part of the ordinary share capital of the company, or any consideration of that amount or value by way of repayment of any part of that ordinary share capital, or|
|(b) the close company repays that amount of a loan or advance from him, or|
|45||(c) he receives consideration of that amount or value for assigning any debt due to him from the close company.|
|In the case of a sale or assignment otherwise than by way of a bargain made at arm's length, the sale or assignment shall be deemed to be for consideration of an amount equal to the market value of what is disposed of.|
|50||(6) Subsections (3), (4) and (5) above shall apply to a loan within subsection (1)(c) above as if it, and any loan it replaces, were one loan, and so that—|
|(a) references to the application of the proceeds of the loan are references to the application of the proceeds of the original loan, and|
|(b) any restriction under subsection (4) above which applied to any loan which has been replaced shall apply also to the loan which replaces it.|
|55||(7) Subsection (1) above shall not apply to a loan unless made in connection with the application of the money, and either on the occasion of its application, or within what is in the circumstances a reasonable time from the application of the money, and that subsection shall not apply to a loan the proceeds of which are applied for some other purpose before being applied as described in that subsection.|
|60||(8) Interest eligible for relief under this section shall be deducted from or set off against the income of the individual for the year of assessment in which the interest is paid, and income tax shall be discharged or repaid accordingly.|
|65||(9) Expressions used in this section which are given a-meaning by any provision in Schedule 18 to the Finance Act 1965 shall have that meaning in this section, and for the purposes of this section—|
|(a) 'distribution' has the same meaning as in Part IV of the Finance Act 1965,|
|70||(b) the question whether a company is the subsidiary of another company shall be determined in accordance with paragraph 9 of Schedule 12 to the Finance Act 1965,|
|(c) the question whether a person has a material interest in a company shall be determined in accordance with paragraph 7 of Schedule 14 to this Act.|
§ Brought up, and read the First time.
(j) In line 13 leave out ' substantially the whole ' and insert sixty per cent '.
(k) In line 20, leave out material '.
(v) In line 21, leave out paragraph (b).
(l) In line 70, at end insert:
'other than sub-sub-paragraph (a) of paragraph (2) thereof '.
(m) In line 71, leave out from beginning to end of line 72.
The Government new Clause 25, and Amendments No. 37, in page 21, line 33, after person ', insert:
'who for the time being devotes substantially the whole of his time to—
on money applied or on a loan to defray money
No. 44, in page 21, line 43, at end insert:
(3) Subject to the provisions of this section interest is eligible for relief under this section if it is paid by a person on a loan under a scheme set up by the employer for his employee to purchase shares in the company.
No. 45, in page 21, line 43, at end insert:
(3) Subject to the provisions of this section interest is eligible for relief under this section if it is paid by a person on a loan to defray money applied to purchase the assets or goodwill of a trading or professional concern or partnership or to purchase shares in a company where the purchaser is, or is to become an employee or active director of that company.
§ 4.15 p.m.
§ The Chief Secretary to the Treasury (Mr. John Diamond)
I beg to move, That the Clause be read a Second time.
We now come to the Report stage of the Bill, and start with one of the areas where there was considerable discussion in Committee. Perhaps it would be 429 appropriate if I dealt very shortly with the general background, Mr. Speaker, as you have been good enough to suggest that a number of Clauses and Amendments should be discussed together.
We are now proposing to move into a new regime, under which interest on a private loan or overdraft is, except for transitional arrangements and where the loan is in connection with the acquisition for improvement of land, to be treated as part of an individual's disposable income, which he disposes for his private, personal purposes as a matter of his choice. Therefore, it is to be distinguished completely from a business expense, whether properly incurred by a sole trader, partnership, close company or open, public company in running a business. This is a simple, sensible and easily understood distinction which will, I hope, enable us to see our way through all the various suggestions which are being helpfully made to improve the Bill. The consideration given to this matter in Committee made it clear that in the transition from an old regime to a new one we should take care to see that as far as possible no hardship falls on those who had entered into commitments on the understanding of the law as it was and the belief that it would not be changed.
That question is not before us now. What we are considering is the other area where representations were made on both sides of the Committee that one should give consideration not only to business expenses but to quasi-business expenses which were such a reasonable extension of business expenses as to justify the continuance of relief, not during a transitional period but for all time. It is with those that we are now dealing.
I begin with the most simple case of a sole trader carrying on his business. If he borrows money it will he easy for him to establish—and it will mostly be the case—that the money he borrows is in connection with his business. It will be easy for him to establish, therefore, there being no real differentiation between his business activities and others, that the borrowing is necessary in connection with his business. Whether the borrowing is to provide a capital asset, current assets, or current expenses, the interest on it will rank as an ordinary 430 business expense, and, therefore, it is not affected by any of the provisions of the Bill. So much for a sole trader.
The next item is a partnership. Where the partners borrow for the purposes of the partnership, jointly as partners, then, again, there is the identical situation of the borrowing being for the purposes of the business and interest being allowable for tax purposes. It is not always the case that it is possible or convenient for the partners to borrow jointly, and it may happen that the partners borrow severally in connection with the purposes of the business.
Having regard to the representations made from both sides of the Committee, I do not think that it would be right or sensible to say that we should distinguish so closely between borrowing by partners jointly and borrowing by partners severally as to allow the interest in one case and disallow it in another.
I am, therefore, proposing to the House that we should treat interest as allowable where it is borrowed by one partner for the purposes of the partnership. Borrowing can take the form of simple borrowing of money and lending it to the partnership; it can take the form of buying a stake in the partnership, a stake being a loan which has no date of repayment attached it it, which is very much the same kind of asset. It can take a variety of forms, but essentially it is a partner on his own, or one who is becoming a partner in this way, borrowing money for the purposes of the partnership. That is the essence of new Clause 25. We are considering here a working partner, not a sleeping partner.
We move to a situation which is not dissimilar from a partner or sole trader, the family business—to use a non technical phrase—or the one-man business, frequently run in the form of a limited company. We know of them in the text books as the close corporation. Similarly, where there is a close corporation and the trader or partner in the close corporation, that is to say, someone in the position of a proprietor, borrows to become a proprietor or for the purposes of the company, then, again, that is so similar to the first simple case with which I started as to justify the allowance of the interest on the borrowing.
That is the case with new Clause 33, with which I will now deal in a little 431 more detail. I hope that I am making it clear that we are looking the whole time at the proprietor or the individual becoming a proprietor. I hope that I am making it clear that we are having regard to the individual who, as a result of the borrowing and as a result of the acquisition of the asset advanced by the borrowing, is taking on a new capacity, if he does not already fulfil it, of being a proprietor.
This would cover the case of the individual buying a stake in the partnership. It would cover the case of an individual who is a director of a close corporation, or becoming such a director, acquiring a substantial stake. The simplest definition of all these cases is that of the person buying a working proprietor's stake in the business—a working proprietor, be it a sole trader, a partner or a director in a close corporation. A working proprietor must mean someone who works, but not necessarily the whole time.
It could not be a sleeping partner as defined for partnership purposes. He does not work for any part of the time. He need not be 100 per cent. employed, because many a sole trader runs more than one business and would be entitled to claim, even if he spent, for example, half of his time with the business.
There has to be a definition of a person who is seriously engaged and working as a proprietor. A proprietor is an easy concept with regard to the sole trader, and with regard to the partner. It is not quite such an easy concept with regard to the close corporation but we are very much helped because the proprietorial interests has been defined for a number of purposes in close corporations. It has been defined as a minimum of 5 per cent. That is a very low figure but it is one which we are proposing to adopt and which we are suggesting to the House, because of the clear precedence and authority on which that figure rests.
§ Mr. Joel Barnett (Heywood and Royton)
Has my right hon. Friend calculated what it would cost in revenue if he removed the 5 per cent. altogether?
§ Mr. Diamond
No, I have not calculated what it would cost, because it is a principle which I would not be willing to 432 face. If it is not a 5 per cent. interest, it is not a working proprietor's stake. If it was something less than 5 per cent. it would be almost indistinguishable from an ordinary portfolio investment. It is a principle which I would not recommend to the House and which I would not be prepared to adopt.
§ Mr. Richard Wainwright (Colne Valley)
Without in any way reneging on his own principle, is the Chief Secretary willing to concede that it might be the beginning of a proprietorial interest?
§ Mr. Diamond
Of course it might be, and when it comes to the end of it and succeeds in being a proprietorial interest the man would qualify and the loan would qualify.
I hope that I am explaining the various stages in the argument by which we arrived at the conclusion that it would be right to make the very considerable concessions being proposed, which my right hon. Friend thought should be proposed having regard to the discussion which has taken place in Committee and to the various representations which have been made at various levels. That broadly outlines the purpose of the two new Clauses we are discussing.
Since it is suggested that we discuss these various Amendments at the same time, perhaps I can deal with them, and the detail now. Amendment No. 44 would have the effect of allowing interest to qualify for relief if it is paid by an employee of a company under a scheme set up by his employer to enable him to buy shares in the company. We discussed this at some length in Committee. This proposal is distinguished from the proposals I am putting to the House in the main because it lacks the element constituting a working director's stake.
Nobody wishes to disregard these incentive schemes, but the law has never put them in a favourable position. Before this Finance Bill was produced the law never favourably treated incentive schemes of this kind under the tax law. Indeed, when attempts were made to obtain special benefit under these incentive schemes, the law was altered to remove the possibility of obtaining that special benefit. The law has never given special benefit to these schemes, and there is no reason why it should do so now.
433 4.30 p.m.
That would not coincide with the philosophy of our proposal and it would make it impossible to hold the line where we have drawn it and where I have previously made clear we intend to keep it, namely, by keeping out ordinary investment in income-producing assets and saying that as long as the loan is incurred to produce on the other side income-producing assets the interest on the loan should be allowed, or it should be allowed to the extent that there is income from the assets.
That is not a proposition which we accept. I have said, and I repeat, that it is a perfectly respectable point of view. I volunteered to the House information concerning other countries where this point of view holds good. I am merely saying that it is not the Government's point of view. It is not my right hon. Friend's view that we should draw the line in that way.
We must draw the line to prevent interest on loans incurred in that way from attracting relief for tax purposes. We must, therefore, reject Amendment No. 34, which would inevitably lead to that situation.
§ Mr. Edward du Cann (Taunton)
We are grateful to the Chief Secretary for the way in which he is taking us through the arguments prominent in his mind, although to some of us on this side of the House they appear to be sophistry. If we see fit to pass the new Clauses, why will the law regard some forms of ownership of property in a specially favourable fashion and others, possibly equally meritorious, in an unfavourable fashion? That hardly seems to be equitable.
§ Mr. Diamond
I am not sure that I have taken the right hon. Gentleman's point. He may be referring to the distinction between holding an asset which is property and holding an asset which is not property. He may be making a different distinction. As to the first distinction, he knows that we have, as a matter of deliberate policy, agreed that money borrowed to invest in land or to improve land shall be excluded from the restrictions proposed in the Bill.
However, if the right hon. Gentleman is saying that I am distinguishing between investment which is similar to portfolio investment, on the one hand, 434 and, on the other, acquiring a proprietorial stake, and if he asks me why I make a distinction between the two, then I say to him that in the case of incentive schemes an employee normally improves his financial position, but does not alter his position in any other respect. He is an employee before he entered into the incentive scheme, and he is an employee at the end of the incentive scheme. His responsibilities are not necessarily different. His stake, his responsibilities and the risk which faces are not necessarily any different.
However, when a person starts to run a business and borrows money for its capital or acquires an interest in a professional practice or partnership business or undertaking, or when a person becomes a director in a close corporation and acquires a proprietorial stake, he changes from being an employee to being a person with new responsibilities, a new stake and new risks. The distinction is very clear and one which we should respect.
§ Mr. Diamond
I am willing to give way as much as the House wishes, but it might be more convenient to hon. Members if I went through the Amendments and then listened with great care, as I always do, to the points which are made and perhaps reply to the debate later.
§ Mr. Ridley
To save time, may I ask the right hon. Gentleman this question at this stage? If a close company goes public and floats capital on the Stock Exchange, will somebody who has borrowed money to take up shares in the close company have the interest disallowed as from the day that the company goes public?
§ Mr. Diamond
If he ceases to be a borrower in a close corporation he will presumably sell his shares or exchange them for other shares in a public corporation. [Interruption.] The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) was contemplating a change from a close corporation to a public open corporation. If he was not—and some hon. Members think that he was not—it illustrates the point I made previously, namely, that on Report, in particular, it is convenient that I should have the 435 pleasure and privilege of listening to hon. Member's arguments and then replying to them.
I come to Amendment No. 37. The main difference between that Amendment and the new Clauses is that the Amendment would allow interest on borrowing by an employee of a company to acquire shares in the company either as an investment or as part of an incentive scheme established by the company. I have already said that we do not propose to treat incentive schemes established by companies in any privileged way under the new law any more than we did under the old law. I need not go over the arguments which I have already adduced.
The effect of Amendment No. 45 would be to allow interest to qualify for relief if paid to enable the borrower to buy himself into a partnership or acquire shares in a company in which he is, or will become, an employee or active director. Therefore, to a large extent, this Amendment covers the same ground as new Clauses 24 and 25, but with the difference that it would enable an employee of a company to obtain tax relief for interest on money borrowed by him to acquire shares in the employing company either as a personal investment or as part of an incentive scheme established by the company.
To the extent that that is happening, I am not able to recommend the Amendment to the House.
§ Sir John Foster (Northwich)
The Chief Secretary referred to new Clauses 24 and 25. I think perhaps he is reading his old brief and that new Clause 24 should be new Clause 33.
§ Mr. Diamond
I am referring to new Clauses 33 and 25. I apologise.
I think that it would be more convenient if we discussed Amendment No. 37 at a later stage. I do not know whether the hon. Member for Crosby (Mr. Graham Page) wishes to discuss Amendment (j) now. I understand that this is a consequential Amendment which refers to an Amendment which he has put down on Clause 21. If he wishes me to speak on that, I shall have to refer shortly to Clause 21 and to the way in which he relates Clause 21 to this consequential Amendment.
436 Clause 21 is designed to prevent individuals from getting interest payment allowed for surtax against dividends by setting up close investment companies with which to borrow money and to buy securities. The Clause provides that in such cases the interest paid by the companies has to be apportioned to the shareholders and charged to surtax. The Clause prevents surtax avoidance in that form.
The problem which then arises is that trading companies and parent companies of trading groups are exempt from the scope of the Clause, and there is no existing definition of a close property company, so that a special rule is needed to exempt such a company. That rule must, of course, be consistent with the Chancellor's policy that individuals shall continue to get tax relief for interest on loans used to buy property. The Clause provides that special rule by exempting a company if the whole or substantially the whole of its income is an estate or trading income.
§ Mr. Diamond
I will give way shortly. What we are concerned with is the phrase "substantially the whole". That is not defined, and that is what the hon. Gentleman is carrying back into Amendment (j). It is not defined, but it would certainly be more than the figure of 60 per cent. which the hon. Gentleman is proposing, and I cannot, therefore, recommend the Amendment to the House. I have no doubt that the hon. Member for Crosby will wish to explain his case more fully when we come to deal with the main Clause. I do not know whether the hon. Member for Worthing (Mr. Higgins) still wishes to intervene?
§ Mr. Higgins
I find that explanation absolutely unintelligible. I should be grateful if the Chief Secretary would give an explanation of that point, perhaps not using his brief.
§ Mr. Diamond
I do not want to resort to the comment that I can only offer an explanation; I cannot carry the matter further than the explanation. I am sorry if the hon. Gentleman finds it difficult to follow.
The hon. Member for Crosby has put down an Amendment to Clause 21 and 437 consequential to that main Amendment, has put down a minor Amendment on new Clause 33. As I am asked to discuss all the Amendments together, I have to explain what I believe to be in the hon. Member's mind in putting down those Amendments. I hope that I have judged correctly what is in the hon. Member's mind, and I have tried to explain why the Amendments would not apply to Clause 21 nor to this Clause. I do not want to, and could not, rule out the possibility of the hon. Member explaining the point more fully when we come to deal with Clause 21.
Amendment No. 51 is intended to enable the parent company of a close property holding group to be exempt from Clause 21 if its property is held by overseas subsidiary companies as well as by United Kingdom subsidiary companies. This is another example of having to deal with an Amendment to a later Clause which results in a consequential Amendment to this Clause.
The hon. Member for Crosby has put down a consequential Amendment, Amendment (l), which is consequential upon an Amendment to another Clause. I cannot accept Amendment (l) for the same reasons that I cannot accept the Amendment to Clause 21. As it is a complicated matter, I think that it would be for the convenience of the House if we left it until I come to deal with Clause 21.
Amendments (k) and (m) would enable interest to qualify for relief if it is paid on a loan raised to acquire any part of the ordinary share capital of a close company, however small.
If I may go over the argument again, there is a distinction to be drawn between, on the one hand, the individual who has the necessary ability, but not the capital to run a business and who has to borrow to establish himself in business and, on the other, the employee who borrows to buy shares in the company either as a personal investment or under an incentive scheme. In the latter case the employee's position is essentially unchanged. That is the distinction which I draw, and I am unable to recommend the Amendment because it does not fall within the general formula, which I think is a wise one, of a working proprietor's stake in the business.
438 I come, finally, to Amendment (v), which leaves out paragraph (b) in line 21. The effect would be to eliminate the test of the borrower working part of his time and result in the borrower not having to work any part of his time. That would be on all fours with a sleeping partner, and I regret, therefore, that I am unable to recommend the Amendment to the House.
I recognise that it is difficult for the House to take in all these matters at the first go, especially those who have not had the good fortune to listen to the many speeches made by hon. Members in Committee. When I have listened carefully, as I shall, to the speeches which will be made, I hope that it will be convenient for me to intervene once more to deal with any points which I have failed to cover.
§ Mr. Iain Macleod (Enfield, West)
The House will be grateful to the Chief Secretary—although I think that the last quarter of his speech lacked his usual clarity—for the careful explanation that he has given, particularly of new Clause 33, on close companies, and new Clause 25, on partnership, which we are taking with it and to which we attach great importance.
The right hon. Gentleman gave a general introduction, concentrated on one or two points on the Clauses, and then went into the Amendments in detail. I do not propose to make detailed comments on the Amendments, though no doubt hon. Members on both sides will wish to do so.
I wish sincerely to thank the Chief Secretary for the way in which he has responded to what we tried to do in Committee. We can look back with some pleasure on the exercise, which has resulted in something that is unique in my experience of Finance Bills—that we have had no fewer than six Government new Clauses which trench on the single basic point of disallowance of interest. It shows how worth while was the Committee stage.
Each of the six points had its origin in Amendments moved from this side of the House, and I freely acknowledge that on a number of points we had support from other quarters of the Committee. I am grateful for what the Chief Secretary has done in meeting in full the undertakings that he gave to us.
439 I wish to put to him a point upon which he can perhaps comment in his reply. It relates to the cost of two new Clauses and, in due course, of the other four. The hon. Member for Heywood and Royton (Mr. Barnett) asked what it would cost to remove the definition of "a material interest" in paragraph 7, of Schedule 14 of the Bill, and the Chief Secretary said, in effect, that he was not briefed on that point. That is understandable, but presumably he is briefed on the cost of new Clause 33 as a whole, which was originally new Clause 24, and also on new Clause 25, the partnership Clause, which perhaps was the one that caused most concern in Committee.
The Chancellor originally said that he expected to gather in £25 million divided —I have not checked these figures—as to £20 million in relation to income tax and £5 million in relation to surtax. These concessions are certainly welcome in general terms, although there are a number of detailed points which we shall wish to raise upon them. We should like to know to what extent these concessions would affect the estimates which the Chancellor then put before the House. I hope that the Chief Secretary will deal with the point in his reply.
I come to my second general point. We have before us a very different series of proposals, taking all six Clauses together, from the proposals which were put by the Chancellor in his Budget speech and enshrined in the first draft of the Finance Bill. The old principle was pretty clear, that is to say, that the charge to tax was struck after allowing necessary expenses to attain it. No doubt what the Chancellor wished to do was also reasonably clear, although I would have objected, and have objected, to the principle. He wanted to abolish this principle and to substitute a new one which allowed only loans for purchase or improvement of land, as in Clause 19, to be exempt.
But the present proposal—which I emphasise is much more welcome—is vastly different. Curiously enough, it does not make more defensible, but less defensible, the position which has been taken up. I could understand it if no exceptions at all were made; one would then understand the big exemption for 440 house building and improvement of land in Clause 19. But as we begin to widen this matter—I emphasise that we are delighted we have succeeded—first, to estate duty, then to partnership, then to close companies, then to all the others, the original principle looks extremely tattered.
I do not want to take back any of my praise to the Chief Secretary, but he said, in response to my right hon. Friend the Member for Taunton (Mr. du Cann), that so far as he was concerned he was drawing a clear line. I am bound to say that he was almost alone in the House in that opinion, and, I have a feeling, on both sides of the House. I do not think that any clear line of argument is left. There is no doubt that the principle had been successful and in some cases triumphantly breached. But the result is vastly less logical, although vastly more agreeable, than the original Budget proposal.
There are a number of points I could make. I emphasise particularly the point raised by my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley), but no doubt the Chief Secretary is looking that up and will reply in due course, but it seems to be a matter of very great importance.
To sum up, I acknowledge our debt to the Chief Secretary and he, in turn, has been good enough to say that this is as the result of some excellent and hard work in Committee upstairs. I do not think that what the Chancellor of the Exchequer has done makes his proposals more logical. I believe that they are less logical. I would very much welcome in due course an account, so far as it can be given, of the cost of these particular proposals.
In conclusion, I should like to say a few words on new Clause 25. This involves the principle of loan for partnership, to which we attach the very greatest importance. It is particularly welcome to have this most important change. For the reasons I have given, the proposal of the Chancellor in his Budget speech, which has now been very much altered, remains objectionable to us, and in due course I will make clear my attitude on behalf of our party to the whole of these Clauses.
But it is appropriate that on the first Clause I should acknowledge that the Chief Secretary has done everything he 441 could to meet the pressure put upon him in Committee. Although there are many detailed points which no doubt hon. Members will wish to press, we are very glad to see these new Clauses on the Notice Paper.
§ Mr. Graham Page (Crosby)
Mr. Speaker has selected Amendments to new Clause No. 33 for debate with new Clause No. 33. Therefore, I propose to address my remarks to the Amendments lettered (j) and (l) in the names of my hon. Friend the Member for Folkestone and Hythe (Mr. Costain) and myself.
As I understand new Clause No. 33, it allows an individual who has become a working proprietor to deduct from his taxable income interest paid on a loan which he has used in the purchase of a working proprietor's stock in a closed company, but in a close company of a certain type described in new Clause 33.
That kind of close company is described in subsection (2) of new Clause 33 as one which is a trading company, a member of a trading group or where the whole or substantially the whole of its income is of one or more of the following descriptions, that is estate or trading income, or interest and dividends, or other distributions received from a subsidiary which is itself within the previous paragraphs of the subsection. It is a very special kind of close company.
Taking paragraph (c), a holding company which has income of a kind other than estate or trading income or income from what I will call qualifying subsidiaries may be excluded from new Clause 33. In other words, any individual purchasing a working proprietor's share by means of a loan in such a company may not be able to charge the interest on that loan against his taxable income. It will be excluded in that way if it is income which is substantially of the kind described in subsection (2).
What other income might such a company have than trading income or estate income? Let me take the case of a property investment company and at once declare an interest in that I am taking the example of a company in which I hold a directorship but in which I have no beneficial interest.
This company, like many other property investment companies, has its 442 income not only from subsidiary companies which hold property but also from assets held in reserve. A wise property investment company always holds liquid money in reserve to take advantage of a good bargain when it is offered. I am sure that the Chief Secretary will know, for example, that a property investment company of, say, £30 million would be likely to hold some £4 or £5 million in a fairly liquid form.
At present, it is common practice for such companies to invest in loans to local authorities. I would venture to say that there is hardly a property investment company of the type that I describe which has not got substantial investments in loans to local authorities which can be realised very quickly—sometimes seven days, sometimes three months, or perhaps six months—kept there for the purpose of taking up a bargain should it appear in the market.
If it is receiving income from that source, it is receiving a type of income which may disqualify it from being a close company as defined in new Clause 33, and it will be disqualified if its other income is not substantially trading or estate income.
What is substantial? In Amendment (j), I have made a plunge in trying to define what is substantial. I have taken a reasonable figure over a number of companies of this sort, perhaps in favour of the companies but not very much so. It is somewhere near the right sort of figure. The Chief Secretary said that "substantial" would be very much more than 60 per cent. How much more? Are we to leave it to the courts to decide? If we leave a vague word like "substantial" in legislation, it is inviting litigation, and there has been litigation over many years on the word "substantial".
We have come to know what it means in the Rent Acts over furnished dwellings, where £13 per annum of an £80 per annum rent has been held to be "substantial". We know what it means in connection with industrial development, where in one case 1,000 firms out of 6,000 were held to be "substantial" and 150,000 employees out of 470,000 were held to be "substantial".
§ Mr. Robert Sheldon (Ashton-under-Lyne)
May I remind the hon. Gentleman that the wording is "substantially 443 the whole", which is quite different from "substantial".
§ Mr. Page
It is just as vague as the word "substantial". I cannot find that the phrase "substantially the whole" has ever been defined by the courts. Perhaps we go back to the 1866 case, where it was held that an hour of gaslight substituted for an hour of daylight is undoubtedly substantial. By this Amendment, I was hoping to bring a moment of daylight into an hour of murky gaslight of a Finance Bill, but the Chief Secretary does not seem to be forthcoming on that point.
My Amendment seeks merely to define what is meant by "substantial". If I am wrong in my 60 per cent., let us have the right percentage and not just a statement from the Chief Secretary saying that it is very much more. The courts may or may not pay attention to what the Chief Secretary has said on the Floor of the House. They are under no obligation to do so, and I do not know how the courts will construe this.
I pass, then, to Amendment (l), which is perhaps not exactly self-explanatory. Let me use the same example of the company in which I hold a directorship. The company has developed a number of properties in Australia by means of subsidiary companies in Australia. It has done so with all the flourish of authority from the Bank of England. It might almost be said that it has been done with the blessing of the Bank, because the company has been encouraged to develop overseas on the right sort of development.
In subsection (9)(b) of new Clause 33, we are told:…the question whether a company is the subsidiary of another company shall be determined in accordance with paragraph 9 of Schedule 12 to the Finance Act 1965.Schedule 12 of that Act was for a totally different purpose. It was for the distribution of the assets of a close company. Nevertheless, we have to turn to that definition of a subsidiary. It says:In determining under this paragraph whether one body corporate is a subsidiary of another, that other shall be treated as not being the owner—(a) of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom".444 Again, using my example of the holding company in the United Kingdom with subsidiaries in Australia, it has to treat the income from those subsidiaries as not being income from subsidiaries, because they are not to be treated as subsidiaries for this purpose, and therefore it will be income of the type which may disqualify it from being a close company under new Clause 33.
The Chief Secretary will see, if he has followed my story this far, that when I start to add the income from loans to local authorities to the income from Australia I am coming very near the 40 per cent. That is why I have chosen 60 per cent. Why should a close company be excluded merely because it holds fluid assets for quick investment and holds some overseas properties in its portfolio? I see no logic in this in relation to new Clause 33. As the Chief Secretary has rightly said, new Clause 33 deals with someone wanting to become a working proprietor—in this case of a property investment company—who borrows money to do so. This is the side of the picture on which the Chief Secretary has concentrated and on which the new Clause and the whole principle in the Bill has concentrated. It is not so much on the nature of the company as the interest of the person going into that company.
Therefore, I think that these two Amendments are reasonable in clearing up not only a difficulty of construction, but in bringing into the new Clause the company of normal structure which is doing nothing immoral or wrong in the way that it holds its assets.
§ Mr. John Nott (St. Ives)
First, I should like to add my welcome to that of my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) for the new Clause. In Committee, we argued long into the night about this subject and, in particular, about the iniquities of the Chancellor's original proposals. I am glad to see that at least some easing of the rigidity of the Clauses has taken place.
In moving an Amendment on this subject in Committee, I commented that Clause 21, as originally drafted, placed upon close companies almost as many disabilities as Clause 22 and Schedule 14 removed. But new Clause 33 will undo 445 much of the harm contained in the original drafting.
As the small companies of this country, of which a major proportion are close companies for taxation purposes, still employ up to half the total manufacturing labour force and account for not far short of half the industrial sales, we are naturally delighted that a young partner, without any capital of his own, will now be able to borrow the money to buy an interest in such a close company without having an intolerable interest burden placed upon his shoulders.
I welcome this concession. However, I use "concession" in its traditional Finance Bill way, rather than what might be described as the true meaning of the word. A concession can be defined, in the vocabulary of Socialist taxation purposes, as the mere undoing, in part or in whole, of the unnecessary damage which has already been inflicted upon the individual and upon companies by earlier Labour Government forays. In the coming pre-election hand-out—which we all anticipate fairly soon, when I hope that the Chancellor will be giving back part of the £2,000 million of extra taxes to those from whom they came—it will be deemed a concession by the Chancellor and we will be considered carping and impolite not to welcome it with open arms.
Higher taxation is the oil that keeps the wheels of Socialism turning and those Socialists who squeak the loudest on the other side get the most oil. Therefore, I hope that we will not be criticised by the Chief Secretary for making a few remarks about the anomalies which new Clause 33 throws up.
The Chief Secretary had to erect a principle upon which to stand, because he knows that it is something which we cannot dispute. The principle that the right hon. Gentleman has erected is that there is inherently something much better much more desirable and far less obnoxious if someone owns 5¼ per cent. rather than 4 ¾ per cent. of the capital of a close company. I understand that the Chief Secretary needs to erect a new principle to support this ridiculous position. But to try to defend a situation in which a proprietor can be defined as having 5¼ per cent. and a non-proprietor as having 4¾per cent. of the capital seems completely absurd.
446 In Committee, when we were debating the definition of a material interest, the Chief Secretary, referring to the 5 per cent., defended it by sayingsuch a holding as will be what the lawyers call de minimis—in other words, of such a quality as not to be taken into account."—[OFFICIAL REPORT, Standing Committee F, 23rd June 1969; c. 573.]5.15 p.m.
This was one of the principal reasons which the Chief Secretary introduced in support of the retention of 5 per cent. as the amount which should continue to define a material interest.
The right hon. Gentleman went on to give examples. But he is turning the argument on its head. It is one thing to take 5 per cent. For the purpose of director-controlled pension schemes, and to take 5 per cent. as being the definition for full-time service directors. But we are discussing someone here who is seeking to obtain a small interest in a company, so it is turning the argument on its head to stick to the 5 per cent. rule, the de minimis provision, as the Chief Secretary defined it in Committee, for the purpose of defining what is a valid partnership shareholding.
This concession which the Chief Secretary has made for a working partner will throw up some of the most absurd situations, and I will mention one or two. It implies that there is something more desirable and less obnoxious to the Chancellor for a man to borrow against a 5 per cent. stake in a close company than an employee of that close company who wants a smaller holding in it. This is not a sensible distinction. I realise that the Chief Secretary is bent upon the principle, but it is not a wise distinction.
It then implies that there is something more desirable and less obnoxious to the Chancellor in the proprietor's shareholding of 5 per cent. in a close company than an employee's or a director's 5 per cent. in a non-close company. I realise that the Chief Secretary has had to erect a principle upon which to stand, but it does not make sense to anyone else.
My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) referred to one point, which I am sure he will develop ft alter. What happens if a close company goes public? The Chief Secretary got involved in a discussion about an exchange of shares. 447 There is no exchange of shares involved. The same shares are still in issue. If a close company becomes public and more than 35 per cent. of its shares are held by the public, then, as I understand the rules, the loan which might have been outstanding will no longer be eligible. So, here again, we have another anomaly.
The Chief Secretary rested upon the argument that employees' incentive schemes had never been put in a favourable position. If by that he was referring to someone who owns 4¾ per cent. in a close company rather than someone owning 5¼ per cent. of the share capital of a close company, I merely comment that he has now put in a specially favourable position the proprietors of close companies, partners in a partnership, and a whole host of other people. As the right hon. Gentleman is now beginning, for the first time, to erect special privileges, it does not lie in his mouth to claim that employees' incentive schemes have never been in a special privileged position. It is the right hon. Gentleman, and not us, who is erecting privileges. My conclusion is that if employees or directors of a public company wish to hold shares in a company for which they work, in other words, to have an incentive in their business, that public company must turn itself into a close company. I worked out, in three minutes in the Library, quite a useful incentive scheme under which those who wish to propagate incentive schemes for employees in non-close companies, or those who wish to work out incentive schemes for someone who has a 4¾ per cent. holding instead of 5¼ per cent. holding, can create a close company to get their overdraft interest allowed. I shall be very surprised, from a careful reading of the provisions to learn that they would be caught. I am told by one of my hon. Friends that they would be. Perhaps the Chief Secretary will explain how. It seems to me that it will be easy to find a way round the problem.
To me the situation is quite idiotic. It shows that the whole disallowance measure in the Bill is either workable and grossly unfair, which is how we started at the beginning of the Committee stage, or it is partially fair but grossly unworkable, which is the situation at 448 which we have arrived now. The only result is to make our tax system fiendishly more complicated than before, and almost impossible for anyone who is not an expert in these matters to know whether his interest will be disallowed or not.
Although I welcome the concession, it has thrown up the most hopeless anomalies, and great unfairness in a large number of situations, only some of which I have referred to.
§ Sir Eric Errington (Aldershot)
Can my hon. Friend tell me whether, and where, the 5 per cent. about which he has been talking appears in this long Clause?
§ Mr. Sheldon
Like so many others, I welcome the second thoughts of my right hon. Friend. There is no question but that this has caused great concern, because the rewriting of these complex provisions was obviously no easy task. We all very much respect, and are grateful to, my right hon. Friend for redefining his attitude in this way, when it would have been so much easier to have dug his heels in and said that any changes should await discussions over the next 12 months. Our first thought must be one of gratitude, and I should like to express mine here.
Following the point made by the right hon. Member for Enfield, West (Mr. Iain Macleod), I wonder whether my right hon. Friend could tell me, not only how much revenue is now expected, but whether he can separate the amount of revenue expected from the disallowance of surtax, and from the disallowance of income tax? From the beginning my support for this measure sprang from my belief that there would be a large amount of money from surtax avoidance. When I found that the sum involved was only £5 million, my enthusiasm diminished considerably, and I wonder by how much more it might diminish if I find that £5 million is very much further reduced.
449 In the new Clauses put forward by my right hon. Friend, it seems that partnerships are being given certain preferences over those who take on minor directorships. This is something about which I have always been concerned, mainly because I have always felt that we have shown greater preference for commerce and the professions than for industry. It has always been the burden of complaint by industry that the Government have tended to understand the City rather better than they have understood industry, a complaint which has been reduced rapidly during the lifetime of this Government by the setting up of various organisations which have worked hand in hand in hand with industry, to the benefit of both industry and the Government.
My preference that we should do something more for industry, because this is where we have been so lacking in the past is not made clear by the new Clauses, because here we are creating a second class of director who is not able to get the small holding as easily as I should like to see in the company for which he works. This is easy to over-state, and I should not want to do that. In some of the small companies 5 per cent. is a very acceptable minimum holding, but there is an increasing number of cases in which 5 per cent. represents a very large amount, indeed. The first rung of the ladder, being so often the hardest, should be shortest. It should be fairly close to the bottom, and because of this provision we are imposing an unnecessary barrier in starting off in this direction.
I have always felt strongly about the small family company changing over from the hereditary element and making use of some of the talent within the company. As one makes use of that talent, it is fairly clear that at some stage those who are being made use of in that way will need to acquire a stake in the company. We know that capital is unlikely to be available for these people. Because of this, I have always felt that it is here that the strongest case can be made for granting a concession to those people who can be induced to have an interest in the firm. We now have a first rung of 5 per cent., and I am sorry that the concession in this case did not go all the way.
450 My right hon. Friend's principle was that less than 5 per cent. would be more like a portfolio investment than an actual participating investment. I do not see this point of principle. If a person is working full time in the organisation, this is not a portfolio investment. It is a direct investment in his own interest and in the interests of the firm in which he operates.
My right hon. Friend said that past Governments had never favourably treated those who invested in their own firms. My reply is that it is about time we did treat them more favourably. If we are concerned about the level of managerial expertise, and the development of trained professional managers, in these companies, it is about time we gave them certain preferences, and it is not sufficient to say that we have not done so in the past. We are bringing forward fresh legislation which inflicts some small penalty on these people. I am saying that the penalty should be removed, and if possible be replaced by some incentive, but I am not asking for that at this stage. I do not complain that these people are being favourably treated. My objection is that they are being unfavourably treated.
I do not want to sound critical of my right hon. Friend, and I apologise if I do so, because I realise the assistance that he has given by bringing forward these new Clauses, but this important point is still missing, and it is something to which I hope he will gibe his attention.
§ 5.30 p.m.
§ Mr. du Cann (Taunton)
I agree very much with the concluding remarks of the hon. Member for Ashton-under-Lyne (Mr. Sheldon) but I cannot begin my own short speech in the same way as he began his, by paying the Chief Secretary a tribute. I would rather follow the theme of my hon. Friend the Member for St. Ives (Mr. Nott)—that of complaint. We all enjoy listening to the Chief Secretary, always. He invariably speaks well, he is one of the most clear-minded men in the House and he is backed by practical experience. But his speech today was an attempt to defend the indefensible. The original Clause was intolerable. He has now mitigated it somewhat, but it is by no means enough.
451 I complain about the proposals which we are discussing in the round for these reasons. First, the Chief Secretary, like the hon. Member for Ashton-under-Lyne used the word "complexity" several times. These new Clauses themselves are long and involved. Surely good law should be clear law. There is far too much complexity in our existing laws. My chief complaint is that, if anything, the law in this field is to be more complex than ever. I find no merit in that.
Second, I disliked intensely the use by the Chief Secretary of the word "concessions". That is an Irishism. I am pleased to see new Clauses Nos. 33 and 25, but the Chief Secretary and the Chancellor were wrong in the first place. They should not now come to the House seeking to obtain credit for rectifying that wrong. We would give them warmer applause, and generous applause, if they were to do a more honourable thing—namely, acknowledge that they had erred, and badly erred, in the first place.
We heard a good deal from the Chief Secretary about stock proprietors. I do not think that he knew what he was talking about. What this Clause does, even as it is now proposed to be amended, is to rule out almost entirely any form of wider stock ownership. How dare the Chief Secretary say that one form or one degree of stock ownership is meritorious and one is not? What arrogance. If a man borrows a few pounds to buy a single share in any company with which I am concerned, I regard that as meritorious, and if he goes on to 5 per cent., so much the better. Why should the Chief Secretary say that he will do nothing for those people, who are the small stockholders of today and may be the larger stockholders of tomorrow?
§ Mr. Diamond
I should like to ask the right hon. Gentleman when I said that one category was meritorious and one was not.
§ Mr. du Cann
But that is the precise inference of everything that the right hon. Gentleman said today and everything which he proposes in the Bill and the new Clauses. That is clear beyond any doubt. I take quite a different view from him—that anyone who buys stock, irrespective of amount, in any type of company for which he works, and becomes 452 thereby a proprietor is as much a real proprietor as the kind of people whom the Chief Secretary only has in mind. Not only does he rule out wider share ownership: he also rules out the injection of capital into smaller companies by individuals. Why, I cannot imagine. This point was well made by the hon. Member for Ashton-under-Lyme.
Last, but by no means least, he rules out success. He says in effect to a company, "Keep small, and the people concerned in your management can borrow to buy stock in the company, but the moment you get large, the moment you succeed, I will rule you out of court and, speaking comparatively, penalise you." That must surely be wrong. It is not surprising that the cynics are saying that, when there is a Labour Government, the rich get richer, but it is rough on the man who tries to stand on his own feet and advance himself by merit.
There has been reference also to a worthwhile Committee stage. I take the view that the discussions during the night in Committee were largely unnecessary. I see no merit in them at all. The fact that they were conducted largely in secret is another matter to which I have the gravest objection. The sooner that we bring the Committee stage of the Finance Bill back to the Floor of the House the better.
§ Mr. du Cann
The arrogance with which the Chancellor treats the House of Commons is one of the most unattractive features of his holding of that office. I know that he was not present in Committee, and I note that he is not here today. He is, of course, not very interested, apparently.
§ Mr. Diamond
My right hon. Friend was sitting here for about an hour and has had to go off to a Cabinet Committee—[An HON. MEMBER: "Very good of him to be here."] I am not concerned with whether it was very good of him or with the pomposity of the hon. Member's comments. I am concerned with 453 the accuracy or inaccuracy of the comments of the right hon. Member for Taunton (Mr. du Cann). Perhaps he would put the matter right.
§ Mr. du Cann
Of course I saw that the Chancellor was here for a short time, but he then disappeared. We have been discussing this new Clause for some time—I am delighted that the Chancellor has returned and that he is listening to the views of his friends and colleagues, whose main concern is to get a little sense into the economic direction of our affairs. That is all that any of us are at. I say this while he is here and I am glad of the opportunity—it is particularly satisfactory that he is here, because he may learn a little about what is going on. For instance, the account which he gave the House the other day of growth in investment was, in my opinion, substantially misleading. The sooner he realises the present facts of the economy the better.
I was saying that we had, apparently, a worthwhile Committee stage. The truth is that the Committee debates on Clause 18 should not have been necessary. In his excellent short speech, my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) said that he loathed these discriminatory and absurd provisions as much as many of us here and many more outside the House. He gave us to undersand that he would be making a clear declaration of the Opposition's view. My view—I dare say that my right hon. and hon. Friends will share it—is that there should be a substantial change in the proposals in Clause 18 and some other Clauses. I hope that, on Third Reading, my right hon. Friend will be good enough to make this clear.
§ Mr. Barnett
There is something about Finance Bills and tax measures which seems to bring out the worst in the nicest possible people. The right hon. Member for Taunton (Mr. du Cann) is one such. The hon. Member for St. Ives (Mr. Nott) is a particular example. In Committee and today, he seems to lose his rag, gradually but very charmingly, as he builds himself up in his speech on a tax problem of this description.
I also want to say a personal word of thanks to my right hon. Friend, even if this provision comes rather later, even 454 if he did not see beforehand what some of us thought was wrong. I do not want to be churlish about this. I am grateful for the concessions—I will call them concessions, even if the right hon. Member for Taunton is not prepared to—but what this large number of new Clauses proves is that, on a very complex new proposal of this kind, a Select Committee on these problems could he of considerable value.
I know that the usual arguments is that, by announcing a tax measure in advance, one enables taxpayers to take avoiding steps. But I do not see why they should not do so anyway by the time it comes on the Statute Book. Any complex measure could do nothing but good if it were discussed for, say, 12 months before reaching the Statute Book. Certainly, one like this could have been of considerable value.
But it is important, because the case against this whole measure, against loan interest, has been so overstated, at least to put in some perspective the situation which existed before. To listen to hon. Gentlemen oposite, one would think that they have never heard of the abuses which were taking place under the old system.
I need not remind lion. Gentlemen opposite of the sort of abuses that took place. For example, taxpayers were legitimately able to make in some cases considerable sums by borrowing and setting off the interest against income while making capital gains, certain capital gains in many instances. Under the old system that sort of taxpayer got a considerable advantage over other taxpayers; that is, millions of taxpayers who were borrowing on hire purchase and under credit instalment schemes. There were, therefore, a number of anomalies long before these provisions were introduced. I mention this to get the matter into some sort of perspective so that we may understand what prompted the Chancellor to introduce this proposal in the first place.
I confess that I was somewhat surprised at the amount of revenue that was originally to be raised. It was £25 million plus the fact that only £5 million of it was to come from surtax payers. I am not sure how it was decided that only £5 million should derive from that source because we are speaking of the margin and the fact that people with investment income of over £2,000 a year would find 455 that some of their interest would, in most cases, be applicable for surtax.
I would be interested to know how the calculation was made because I cannot help thinking that, like other statistical errors of which we have heard recently, one further error may have been made in this case, with the result that the proportion applicable to surtax may be somewhat larger than we have been led to believe.
I return to the new question of principle to which the Chief Secretary referred. The case for the 5 per cent. concept need not be overstated. In many cases of close companies in which less than 5 per cent. of the shares have been taken up the people concerned will be given an opportunity to pay for them over a period of time and the percentage will therefore be available to members of the staff. The case does not need restating as my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) made the important point against the principle which the Chief Secretary adduced when he referred to the need to give young managers and executives in growing close companies positive encouragement. We must realise the great problems which every managing director and chairman faces in finding the right sort of executives. It is positive encouragement that is really necessary; but in this case some help can he provided simply by removing a slight discouragement.
The Chief Secretary introduced the new principle of proprietorial interest. When I asked about the cost of the 5 per cent. he said that he was not even prepared to consider what the cost would be, even if it was negligible, because the principle of proprietorial interest had been set at 5 per cent. It was rightly pointed out, however, that this is an odd sort of principle because at 5¼ per cent. everything is satisfactory and the interest is allowable while at 4¾ per cent. it is not.
I appreciate that once one has a dividing line anomalies will be created. I pointed out in Committee that the only way to avoid such anomalies in respect of loan interest would be to disallow the lot, as the Minority Report of the Royal Commission suggested; but that would require an international agreement. Thus, 456 whatever one does, a great many anomalies will be created.
It follows, therefore, that we must consider if the anomaly of which we are speaking is worth creating by having a dividing line based on proprietorial interest. Would it not be wiser to accept the Opposition suggestion, bearing in mind the fact that the principle would not necessarily be infringed because any employee taking up less than 5 per cent. would still need, even if the Amendment were made, to be working for the greater part of his time in management or in the conduct of the business of the company? This would be a sufficient dividing line. In other words, if an employee is involved in the conduct of the business, he should be able to take up any percentage of shares in a close company.
I accept that my right hon. Friend was right to leave it to close companies. He must, therefore have been right in his reply to the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), since if one is not to allow open company investment as an allowable item of interest, then once a close company becomes a quoted or open company, that amount of interest would not be allowable. If it were, one would be creating another anomaly.
§ Mr. John M. Temple (City of Chester)
The hon. Gentleman is explaining why there should be a difference between the two types of company. Has he considered the question of unlimited companies, since it is possible today for close companies to turn themselves into unlimited companies?
§ Mr. Barnett
The question of an unlimited company would not be dissimilar in that it might be an unlimited but a non-close company. However, we are talking about close companies, and we had better leave it at that.
Accepting even the Chief Secretary's desire to have this principle and, therefore, the need for a dividing line, it should be sufficient to stipulate less then 5 per cent, or any percentage. In other words, there should be no need to create a new anomaly. It should be sufficient that an employee engaged in the management or conduct of the business should be able to borrow to buy shares, and I hope that my right hon. Friend will find 457 it possible to accept the Opposition proposal to this effect—while making it clear, however, that it is not a matter of enormous significance. I am sure that if he checks the cost, he will find that it would be infinitesimal and that the principle involved would not be infringed.
§ Mr. Michael Shaw (Scarborough and Whitby)
I agreed with nearly everything that the hon. Member for Heywood and Royton (Mr. Barnett) said. The most important part of this debate hinges on the ability of the employee, be he a director or anything else, to acquire a stake in the company. Along with that we must decide whether or not there should be a dividing line at the 5 per cent. level.
The debates in Committee on this subject and our discussion today remind me of the debates we had last year on the aggregation of children's income with that of their parents. First, a principle was established. It was then seen from the debates that alterations had to be made. Specious reasons were found to enable exceptions to be related in a vague way to the originally enunciated principle. The result was to make the whole position untenable. That exercise has been repeated on this issue despite—perhaps because of—the concessions that have been made, welcome though they are.
We must accept that many close companies today have substantial capital requirements. Figures of £500,000 and upwards capital are common. If a young director has to acquire a 5 per cent. shareholding in a £500,000 capital company he has to have a considerable holding. If he can take the full £25,000 he will have the advantage of offsetting the loan interest against his income, but a young director offered a £10,000 holding does not have that advantage and that does not seem equitable. This difference is absolutely artificial.
I am particularly interested in two Amendments suggested to the new Clause, one of which is starred and in my name. Here we are up against a real difficulty in that most of the Amendments—there are 135 Government Amendments to be considered on Report—have appeared very much at the last moment, over the weekend. One therefore has had great difficulty in going through them all and 458 consulting people outside who are interested in the matter and forming a conclusion. The new Clause itself is welcome because it goes along the path of widening the original concept, but on the question of proprietors and their treatment we are working at cross purposes in this new Clause with what is attempted in Clause 22. That Clause removes the various distinctions which restrain the amount of directors' remuneration that can he paid in close companies.
No longer in future will close companies be limited as to the amount of remuneration they can pay directors. From now on directors working full-time in a business and holding less than 5 per cent. of the capital can continue to be paid any sum and it will be allowed for corporation tax. If they owned more than that number of shares the amount of remuneration allowable was previously limited. If they worked only part-time usually it was disallowable. All those distinctions have now gone and all directors, full-time or part-time, provided the remuneration is in relation to the work done, will be treated equally. Yet now a new distinction is to be made whereby some directors will be allowed to borrow money and have the interest set off against income for the purposes of shares while others will not. It seems that we shall never get things made more simple. If we accept that all directors should be treated equally with regard to remuneration we should treat them equally when it is a question of borrowing money for the purpose of shares.
Often in close companies directors work part-time because they have other interests in other businesses, but they play a vital part in the prosperity of the Company. They may be financial directors or persons who have been asked to join with the person who does the actual day-to-day running of the company to get it on its feet, and they put in a considerable amount of money. The essence of the close company is that, much more than a public company, it has to seek working capital from within the resources of the directors and the shareholders themselves. That has never been more true than it is today. From the personal qualities of the directors and their personal resources the working capital must be found.
459 Although a director may not work whole-time in a business, he may be called upon from time to time to lend money to that company. He should equally be allowed, when he finds that money to assist the company, to have the interest charged against his income. The whole concession that has been made brings in its train, through the way in which it has been done, complications which are illogical and entirely unnecessary. The more the principles which are claimed to lie behind this legislation are explained and the more exemptions granted, the more clear it becomes that the proposals relating to Clause 18 and the new Clauses which go with it are ill-founded.
§ Mr. Richard Wainwright
The two new Clauses represent a clumsy act of repentance by the Government. As the hon. Member for Scarborough and Whitby (Mr. Michael Shaw) reminded the House, it is an act of repentance at a most inconveniently late moment so that the new Clauses have not been subjected to thorough discussion in expert circles. It has been difficult for hon. Members on the Opposition side of the House to have consultations about them. One wonders whether there has been sufficient consultation by hon. Members on the Government side. I doubt whether hon. Members are wise, even though it is charitable, to give a qualified welcome to these new Clauses because the complexity and, even more, the uncertainty which they contain will cause a great deal of trouble to the Board of Inland Revenue, the courts and —more important—the taxpayer, in years to come.
The new Clauses do not approach the only reasonable way in which to tackle this very important and, in many ways, desirable question of getting rid of indiscriminate tax relief for loan interest. No party has been more enthusiastic than mine in wanting to get rid of that indiscriminate relief. As many other countries discovered in tax law long ago, the only way to deal with the question of whether loan interest should properly be allowed or disallowed is to set up an account of the taxpayer's affairs. On one side there should be the interest on the loan and on the other any taxable income arising from the use to which the loan has been put. Until such an account 460 has been set up relating the taxable income arising from the use of the loan to the interest which represents the cost of the loan, we cannot begin to have an equitable basis for allowing or disallowing tax.
In such a simple account, if the loan had been used only for the purpose of pleasure or mere personal benefit there would be a nil entry on the side of the taxable income resulting from the loan. In those circumstances it would be entirely proper, and it ought to have been done long ago, to disallow the whole of the interest. Where the loan is raised to make an investment which in any one year produces some taxable income it is only reasonable that that should be set off against the loan interest which was in question on disallowance. The way the Government have tackled the matter is producing uncertainty and giving the Revenue the advantage both ways. To that this House should never consent.
I speak particularly to Amendment No. 37 in the names of two of my hon. Friends and myself, the broad purpose of which, in contrast to new Clause 33, is to eliminate both the limitation to a close company and the limitation as to which we have already heard much good sense this afternoon—the arbitrary limitation of the 5 per cent. minimum holding.
As to the Government's intention to allow this relief only where a close company is involved, the House should be given much more time to reflect. Right or wrong, this puts the concept of close company to an entirely new use. Hitherto, the concept of close company has been invoked by Governments of various shades for revenue purposes because, theoretically at any rate, a close company has much more opportunity of arranging its affairs to minimise its tax obligations. Therefore, in one way or another it is reasonable that such a company should be set apart from others and subjected to a certain amount of supervision and restriction.
This is not the use to which the close company is being put in the new Clause. The close company is being singled out, for the first time in our tax legislation, for quite a different purpose. We have not heard sufficient justification for this 461 innovation. Neither side of the House has had time to reflect on this wholly new importation into our tax legislation. In any case, I cannot see why this incentive, this honourable scheme of share purchase in a company, should receive Government encouragement only when a close company is involved.
The second point of difference between the Liberal Amendment and the Government's new Clause relates to the strange arbitrary minimum. I do not wish to cover the ground which has been so well covered already, but I emphasise that in legislation for this purpose there can be no virtue in legislating by way of percentage, because in two different breaths one may be considering 5 per cent. of one of the largest glass-making companies in the world, for instance, or 5 per cent. of a newly established grocers shop. It is manifestly unfair to deal with these in the same breath for tax purposes.
My constituency, which was the centre of very early industry, has a large number of very important close companies. In that area people with as much as 5 per cent. in certain well-known wool textile or engineering concerns are the lords of creation. Nobody regards them as small fish because they have 5 per cent. in some of the big companies in my constituency. Yet I readily concede to the Chief Secretary that there are other companies so small that 5 per cent. could be represented as merely trivial. Therefore, the choice of a percentage as the vehicle for the Government's second thoughts is wholly unfair, and I hope the Government will have third thoughts on that. Share purchase by executives—by anybody working for a company—is to be encouraged, and it must be recognised that it must start small.
I pointed out to the Chief Secretary in an intervention that a man may start with perhaps only 0.1 per cent. of the share capital of a company but with genuine and honourable intentions of building up a much larger shareholding over the years as loans or savings become available to him. The Chief Secretary's reply, which I hope I paraphrase correctly, that if the taxpayer would only be patient all would be well when he had achieved his 5 per cent. missed the point. The tax relief is far more important in the ordinary run of cases to 462 the working shareholder in the early stages of his career as a shareholder. In many companies, by the time the shareholder has achieved 5 per cent. he may even be able to laugh off the burden which the Government are imposing on interest payers generally. It is most unfair to knock these people down in the early stages of their acquisition.
This should he particularly abhorrent to hon. Members opposite, because their political philosophy, I believe, starts, as does mine and that of my right hon. and hon. Friends, from the basic proposition that Britain industrialised itself on the tragic basis of gross inequality of wealth at the time when we started industrialising. This down the generations has multiplied and given us a scandalously unequal society. It would be out of order to discuss them, but there are many ways in which this scandalous: inequality can gradually be put right. Cannot the Government concede that in a highly dangerous and unequal society one very practical way of putting some of that inequality right is to encourage people to borrow to acquire wealth?
One way of making up for the inequalities of past generations is when firms with at any rate a certain amount of altruism encouraged some of their employees to borrow, often on reasonable terms, to acquire a stake in that company and, if they are lucky, to increase the degree of equality of wealth, at any rate inside a particular corporation. On that ground alone, of reducing the tragic inequalities in the commercial side of our society, I should have thought that the Government would have adopted the more broadminded approach.
§ Mr. William Baxter (West Stirling-shire)
I hesitate to enter into this debate because I recognise, having listened to some of the speeches, that there are present considerable experts on the question of taxation and the interpretation of the various provisions pertaining to our tax system; and I start from the additional disadvantage of not having served on the Standing Committee which considered the Bill.
I want to support the point of view which has been expressed by the hon. Member for Colne Valley (Mr. Richard Wainwright) and by my hon. Friend the 463 Member for Ashton-under-Lyne (Mr. Sheldon) that the whole system of taxation, especially that pertaining to close companies, is very complicated. The Government have been asked why they pick on 5 per cent. The average man—I take myself to be an average man—will find great difficulty in seeing where the 5 per cent. comes in, because we have not even had time to study the whole implications of the Clause and the various relevant Measures. The application of 5 per cent. over the board is in itself a great inequality, because it is based upon different sets of circumstances. To a close company with a small capital and small profits it means little but to the larger company it may well mean a great amount.
In Scotland recently, the Economic Planning Council set up a special subcommittee to investigate why people were not starting businesses, why young men and women were not prepared to start businesses. The curve of the graph is gradually falling, and few people are prepared to start new businesses now. The reason can be found in the taxation system imposed upon them. The great wealth of our nation, the vitality of our nation, did not come from the large oaks but gradually grew from the small acorns. If we stultify the starting or developing of small businesses, we stultify the fundamental growth of our nation.
I am interested in several businesses, one of them a small painting contractor's business. Last year, the inspector of taxes made us disburse £2,000 and more of profit to the directors, my wife and me. That money was going into the development of the business, but the inspector of taxes thought that the company should not be further developed. What qualifications he has to make such an assessment I am damned if I know. He never had a business and does not understand the problem in running a business.
Whether we are politically in favour of a better social order from one point of view or another, there must be a broad basis of agreement and understanding among sensible men and women that we must stimulate the growth of industry. The first and best way to stimulate that growth lies in our smaller industries. The Economic Planning Council need not look far to find the reasons why people are 464 reluctant to set up in business. There is no need for a special sub-committee in Scotland to ascertain the reason. The taxation system is too difficult. That is it. It is impossible for an ordinary man to understand the basis of taxation, and this in itself is tantamount to a negation of good legislation.
My view, for what it is worth, is that there are too many academics not only in the Government but in the Opposition, too, people with too much power to put into operation theories and pet ideas which have no practical basis. When it comes to practical affairs, the ordinary man, the elementary schoolboy who has made a reasonable success in business, knows what is needed, but his view is of no consequence. He does not use phraseology which tickles the ear or whets the appetite of good conversation. He is just a plain simple man. But the plain simple men are the backbone of our nation in peace or war. If we do not give them a better incentive to build new industries from the foundations up, we ruin the nation's future.
I warn my right hon. Friend that there is no need to set up special committees in Scotland, England, Northern Ireland or Wales to find out why people are not starting new enterprises. The reasons are to be seen here in the Bill and the Notice Paper. One need not look further.
I apologise for intervening in the debate. I cannot fully appreciate all that is contained in the new Clauses because I am not a trained chartered accountant. But it is not trained chartered accountants who start our businesses, although chartered accountants have had a lot to do with running them in the past. My right hon. Friend would do better to heed my warning, and I warn the Opposition Front Bench in the same terms.
§ 6.15 p.m.
§ Sir J. Foster
Let us imagine that three people are working hard in the conduct of business. Two of them are working—I use the words of the new Clause—for the greater part of his time in the actual management or conduct of the businessof a close company. One of them borrows some money and acquires 5 per cent. in the business of the close company. He has his interest allowed. The other does not have enough money, cannot acquire 5 per cent., and so he is penalised. The 465 Labour Government say, "Down with him; he cannot have his interest allowed" If ordinary men in the country understood that, they would criticise the Labour Government for it. Why should not a man who has not enough money be allowed his interest and be able to build up his stake?
The third man works for a partnership. A partnership is sometimes little different from a close company. He borrows some money and buys 1/2 per cent. of the value of the partnership. He has his interest allowed. Why?—because we must benefit people who work for partnerships. Somehow or other, the name "close company" is regarded as a dirty word. They are family businesses. The right hon. Gentleman tried to distinguish between one and the other and said that it was not a term of art, but family businesses are partnerships, sole traders or close companies.
The result is ridiculous, and it is unfair. We on this side are just as much against unfairness as hon. Members opposite, but they want to arrogate to themselves the monopoly of spotting unfairness. We may sometimes disagree about what is unfair, but I believe that both sides are against what is not equitable.
There has been a good deal of talk about concessions. I hope that my Front Bench will not be too grateful to the right hon. Gentleman or talk too much about concessions. I can imagine the Prime Minister making his appeal at the next general election and saying, "The Labour Government made more concessions in four years than the Conservative Government did in 13 years". Why?—because the Labour Government put forward more untenable propositions of policy and they had to make more concessions. I can imagine the Prime Minister saying, "Just look at the number of times the Conservative Front Bench said that they were grateful for concessions. Vote for the Labour Party."
The hon. Member for West Stirlingshire (Mr. W. Baxter) spoke about the complexity of our tax laws. I ask him to look at the drafting of the new Clauses, referring first to new Clause 33, subsection (3). If a man borrows to buy 5 per cent., then, while the loan is in progress and he pays interest, he is allowed the interest 466taking the period from the application of the proceeds of the loan until the interest was paid as a whole".In the first place, that is bad English. It is not the interest which is "paid as a whole" but "taking the period as a whole". It is confusing to the layman and he wonders what "interest paid as a whole" is. A person in a close company has to work throughout the period taken as a whole. If he is in a partnership, on the other hand, different words apply and he must do it "throughout the period".
The lawyers will say that if different words are used in different places for more or less the same thing, there must be a serious financial and drafting reason, and "throughout the period" must be different from "taking the period as a whole". Why should we write that a person with 5 per cent. in a close company should take "the period as a whole" during which he must work, whereas the partner must do it "throughout the period "? Will the right hon. Gentleman explain why there is that difference in wording, and what the difference means? Will he apply his great acumen to explaining the reasons for the difference, or, perhaps, obtain help from those who are in a position to help him on it?
Under new Clause 33(7), the loan must be used within a reasonable time for the purposes of the Clause, and any loan the proceeds of which are applied to some other purpose before being applied to the real purpose should be disregarded. In other words, if one borrows £X and uses it for some other purpose before buying one's 5 per cent, it does not qualify.
These words are dangerous, because it seems to me that if one puts the money on deposit it is applied for some other purpose. The right hon. Gentleman assured me that that was not so, but I still do not see that. The words seem to exclude those who are perhaps more sophisticated about getting the highest amount of interest from making local government loans or buying gilt-edged stocks. When one borrows £X to buy one's 5 per cent. all the various legal formalities may have to be concluded but the lender may insist on the money being taken now, and it seems to me that the provision puts too much of a brake 467 on using the money properly in the meantime, because it could be said that it has been applied for some other purpose.
I would be grateful if the right hon. Gentleman could answer that point, explain the difference between "taking the period as a whole" and "throughout the period", and say why a partner can buy less than 5 per cent. whilst someone in a close company cannot.
What is the right hon. Gentleman's doctrine of proprietorship? He has adopted a proprietorship which seems to apply only in a close company, whilst for all practical purposes a partner is much more of a proprietor than a shareholder with 5 per cent. What has become of that 5 per cent. doctrine of proprietorship as applied to a partnership?
§ Sir E. Errington
It is my wish that consideration should be given to the staff of the Inland Revenue when we consider a Clause like the one before us. I am on an Estimates Sub-Committee on the administration of the Inland Revenue, that has not concluded its consideration, but it is clear that it is extremely difficult to obtain adequate staff for the Inland Revenue.
It is very difficult to understand new Clause 33. I am not at all certain that I do understand it. I assume that it is a matter that will have to be dealt with as on the shortfall basis by the inspectors of taxes with regard to the close company. Is it fair to introduce a complicated Clause of this character in such a way that every inspector of taxes may well have to consider the complex position?
The difficulties of the shortfall have already been indicated. The inspector must consider whether it is necessary to allow a certain portion of a shortfall in order to help the continuance and development of a close company. The Clause includes a number of difficult matters which, once again, the inspector will have to decide.
I do not think that that is the best way of dealing with these problems, generally speaking. It is possible that on a technical basis it might be possible, but where, for example, subsection (2)(c) of new Clause 33 says:…if the whole, or substantially the whole, of its income is one or more of the following descriptions …468 surely that is something that may be extremely difficult to arrive at? It may not even be possible to arrive at what is substantial.
In subsection (7) we find the provision:…either on the occasion of its application, or within what is in the circumstances a reasonable time from the application of the money, and that subsection shall not apply to a loan the proceeds of which are applied for some other purpose before being applied as described in that subsection.Those are just two examples of the difficulty that arises. I believe that generally the inspectors of the Inland Revenue are trying to do their best. The investigations of the Estimates Committee show that clearly. But the Government are imposing on them a degree of work and new legislation which may result in a breakdown. It is not possible to be perfectly simple in drafting income tax law, but I wonder whether the Government have given enough consideration to the situation that arises in the Inland Revenue, where there is a shortage of staff, particularly qualified staff, to deal with difficult problems like this.
It is no one's fault, but it was only this afternoon that we knew that the new Clause would come before us today and he discussed. It is not fair either to the House or to those who will have to work it on the ground. I do not agree with the suggestion that we should have a Select Committee to deal with questions that may arise before budgetary matters are decided. But much more careful consideration should be given by the Government to avoiding complexities, which mean bad administration if they are not easily explicable.
§ Mr. Kenneth Baker (Acton)
The Chief Secretary enunciated another set of tax principles this afternoon, and I could not help recalling his speech on last year's Finance Act, when we were dealing with Section 15 on the aggregation of children's income, which he defended by a completely new principle, devised for the moment, of the family spending unit. This was rightly attacked by the Conservatives as the elevation of what is little more than party prejudice into principle. The principle he enunciated this afternoon is just as bad.
There is little doubt that Clause 18, which introduced a new principle into our tax laws, a fundamental change in our tax practice, has not been properly 469 thought out. It was followed by Clause 19, which allowed tax relief to continue on interest on loans for houses and improvements. In Committee substantial Amendments were moved which the Committee did not accept because of the even voting—which established the principles on which the whole operation would work. Now, as the Bill is about to become law, we have further substantial changes which, clearly, again have not been properly thought out.
The Chief Secretary has made two concessions this afternoon. One is for close companies and those who borrow to invest in close companies, like family businesses, and one is for partnerships. Why has he selected these two types of activity? The answer in respect of partnerships is obviously that we made a very good case in Committee. It was sympathetically received, because three of the Treasury Ministers are ex-professionals who were in partnerships, I believe, before entering the House, and they readily understood the arguments.
Why has the close company been selected? Why should a director of such a company be given this privilege by a Socialist Government? It is an extraordinary anomaly, and it is clear to me that, the Government have not really sorted out their attitude to close companies. One year they encourage them, another year they discourage them. It is rather like Pavlov's dogs, who were trained always to come for their food when they heard a whistle and to crouch in fear when they heard a bell. Eventually hunger could be stimulated by sounding the whistle and fear by ringing the bell. Finally, Pavlov sent the dogs mad by blowing the whistle and beating them, and ringing the bell and giving them food. This is how the Government treat close companies—one year they are encouraged and another year they are positively discouraged.
This may sound ungrateful, because any support for close companies is to be welcomed, but I want to put the case for a group of people who have been completely omitted from these concessions and who are the most deserving. The partnership case has been conceded. Partnership cases and problems of partnerships are always well represented here because so many ex-partners are Mem- 470 bers of this House. Close company cases are well argued here because many Members on both sides are directors of close companies. The case which often goes by default is that of the young executive in business with no capital., working not for a close company but perhaps a medium-sized public or private company, trying to build up a stake in that company.
How do we motivate that sort of young person, my contemporaries? Many of my friends are in this situation, as I was. They used to be motivated before the 1966 Act by being allowed to purchase share options. This was disallowed by that Act, and then various companies introduced, with the complete approval of the Inland Revenue, various share purchase schemes which had to be approved by their directors. The mechanics were straightforward; companies were allowed to lend their younger executives and employees a certain amount of money, usually their annual salary. That money was invested in the shares of the company. It could not be used for speculation on the Stock Exchange, and these people usually had to pay the full rate of interest.
I should declare an interest, because I am still a member of one of those share purchase schemes. In future these schemes are out, because if a young executive has to pay interest on his loan he has to see his shares appreciate by at least 15 per cent. a year to cover the interest. This is a substantial appreciation year by year, and yet these are the sort of people whom both sides of the House generously accept we have to motivate, to keep in this country, and to give them an incentive to create personal wealth. But they are not protected or given any assistance by these Amendments.
Extraordinarily Clause 19 allows a person to borrow £500,000 to build a swimming pool in a garden and have the interest allowed, yet the young executive who borrows only £2,000 or £3,000 to buy a stake in his own business is penalised.
I turn now to the sophistry of the Chief Secretary. He tried to establish a principle that interest should be allowed on loans which d id not produce an income, hence the build-up of a stake in the partnership of close companies. 471 There are lots of other instances not covered. For example, there is money used to buy pictures, furniture or silver in the antique market. These do not produce income and, obviously, the Treasury will not allow interest on them.
Returning to the analogy of the close company, what happens when a close company goes public and the directors of the close company, under this Government Amendment, are allowed to borrow money to buy shares in the close company? Suppose that company is fledged on the Stock Exchange and becomes public, but remains a close company. There are thousands of these. Does the axe fall and does the Treasury say that all the directors and owners of close companies at that point, when they go public, shall have their interest disallowed?
This is the sort of inconsistency which we are led to by trying to establish a bogus principle. Obviously, these concessions are welcome but they do not help the most deserving section, the young executives. Ironically, these concessions accentuate the gap between the very rich, the directors of large close companies, who can now borrow thousands, indeed hundreds of thousands of pounds, if not millions, to invest in their own businesses, while the young executive who has no capital and is trying to create some, is prevented from doing so.
This is why I believe that Clauses 18 and 19 distinguish between our two parties. This is why I believe them to be the most important in the Bill. The attitude of hon. and right hon. Gentlemen opposite is one of restriction and clamping down, whereas we hope to use the tax system to promote the creation of wealth by giving incentives to the young and the deserving.
§ Mr. David Howell (Guildford)
As one who did not have the privilege of being a member of the Finance Bill Committee it would be churlish of me not to congratulate hon. and right hon. Members on both sides for the work that they did and for the way in which their efforts have borne fruit, although it has been very puffy and bloated fruit. The most remarkable word I have heard issue from the Chief Secretary's lips today came at the beginning of his opening speech when he called these Amendments "simple". 472 How he can describe this mass of wording which has to be spaded on to the Statute Book as "simple" passes my understanding.
His first point dealt with partnerships. It must be acknowledged that interest on borrowing for a partnership is to be deductible. This decision has been taken in a way which has given many hundreds of thousands of professional people a very nasty turn indeed. From Budget day until the day when this Amendment appeared it seemed as though the Government were proposing to strike at the very heart of the development of commerce and services of all kinds, doctors, general practitioners, "vets", and all kinds of partnerships in the law and among accountants.
It seemed that by this legislation, which came from out of the blue, the Government were determined to strike down these activities and put at a disadvantage everyone setting out on this kind of career in which they would progress towards these partnerships. As the hon. Member for Heywood and Royton (Mr. Barnett) said, this is not a happy way for a Government to go about bringing before the public such a measure and taking public views and reactions upon a major development.
This is the kind of thing where a Select Committee would have been useful or where the Government could have made good use of that valuable innovation, the Green Paper. That would have helped and saved many worries and much correspondence and a good deal of distraction by thousands of people who are constantly being urged by the Chancellor and the Government generally to work hard and concentrate on higher productivity. This was not a very clever way of going about it, but I suppose that we should at the least be thankful for the relief.
The next item dealt with the family business, the close company, and this new creature to be put on the Statute Book, "a working proprietor". Here we move from some degree of precision to pure surrealism in trying to describe what it is about which we are legislating. When we examine the concept of a working proprietor in the sense in which the Chief Secretary described him—he said that he need not be employed, 100 per cent. but possibly half time; the descriptions were very vague—or consider the working 473 partner who apparently suddenly becomes privileged when he has a 5 per cent. interest in the company but not before, we are dealing with obscure and meaningless definitions which, when interpreted in the courts and by Inland Revenue inspectors, will cause far more complexity than almost any other tax measure put on the Statute Book by the Government.
I agree that there is no cause to welcome such a bizarre selection of Amendments of such vast complexity creating so many new anomalies. They will cause many difficulties among people who have already been severely worried by the Government's attempts to legislate in their presentation of intentions when the Bill was first brought forward.
I come to the word to which so many Members have referred in discussing the first two massive Clauses—"complexity". It is clear to me from Written Answers which I have had from the Financial Secretary—I am sorry that he is not here today, and I hope that he is recovering from his illness—that the Government rushed into this Measure without carrying out any proper research and without knowledge of the administrative require-merits, administrative implications or costs of it. It is clear from the replies about the lack of information, even about the number of people applying for relief on Interest on overdrafts and loans for this kind of thing or any other activity, that the Government plunged into this legislation in their characteristic way without any understanding of the administration of what must be regarded as an integral part of their reforms. If the Government wish to introduce these highly complex reforms, let them work out the administration of them before they push the country and Civil Service, in this case the Inland Rvenue, into more impossible tasks.
As my hon. Friend the Member for Aldershot (Sir E. Errington) rightly said, that unanswered question hanging over this Clause—perhaps it will hang over many other Clauses and Amendments—is what administrative effect will it have. How will the burdens be sorted out? Who will do the work? How will the tax inspectors, who are already near the end of their tether in many respects, cope with the new complexities? If there is one epitaph which I should like to put on this Bill—
§ Mr. Speaker
Order. The hon. Gentleman can put his epitaph on the Bill at Third Reading. He can put an epitaph on the Clause.
§ Mr. Howell
If I may suggest a preliminary draft epitaph, it is fair to say that not since the time of the early Tudors has the tax administration of this country been in such chaos, nor have men had so little knowledge about how much they do or do not owe the State. The new Clause will head us not in the direction of more simplification of the tax system, which should be the keynote, but rapidly over the horizon in the opposite direction.
§ 6.45 p.m.
§ Mr. A. P. Costain (Folkestone and Hythe)
I did not have the privilege of serving on the Standing Committee, but, with a tax expert, I have had the advantage of reading the OFFICIAL REPORT of the Clauses in which I was most interested. I had almost a tutorial on this subject. I congratulate my hon. Friends on the fine show which they put up in convincing the Chancellor of the Exchequer of the error of his ways. To say that he has granted concessions is quite absurd. It is like knocking down a man, breaking his leg and then being thanked for picking him up.
I am interested in the first new Clause to which I tabled an Amendment. I wish to declare an interest, because I am a director of a public company. I am a director of a close company. Both are in the same type of business. In both companies, because of the present tax system, we face a very serious problem in deciding how we can encourage young executives and leading craftsmen to take a real interest in the company and not join the brain drain. One of the greatest problems of my group throughout the world is to persuade senior and first-class men with initiative to stay in this country because there are so many tax advantages if they work for a company overseas. Hon. Members who have studied some of the recent issues which my group has put out will know that we have been able to encourage top level people to stay in the group but not in this country.
When I think of the difference between a public company and a close company, and when I relate Tom Smith in one with Bill Jones in the other, the situation does 475 not make sense. Both are anxious to become top executives. They are anxious to obtain some benefit from their skill and enthusiasm. They want to buy shares in their company, and, because it is impossible, with present taxation, to make any savings and bring up a family at the same time, the only way in which they can buy shares in their company is to borrow money to pay for them. The dividends which they receive from the shares are set off against the interest on the money they borrow. As long as an individual has to nay tax on his dividends, he has not the opportunity even to pay the interest on the loan, let alone pay back any of the capital. Under the Clause a member of a group which is a public company has not a chance. For some reason, the Government have decided that people who work for large firms should not own shares in their company and should not take an interest in their company and they have ensured that they are taxed in such a way that they never can. This is absurd.
The individual in a close company, provided it is small enough, has the chance of buying a 5 per cent. interest. People who work for small close companies are not always ambitious individuals who want to take an interest in their companies. Unless they are able to buy a 5 per cent. holding they have the tremendous disadvantage that they cannot offset the interest.
My taxation advisers and myself have been following the debates on the Bill and we have almost had a bet on how the Government would get out of their present predicament. We predicted that they would propose the worst of all possible worlds, and that they have done. It is not a difficult thing to bet on; they do the same thing so often. It is absurd that a man can have interest allowed only if he is rich enough.
This is not merely a question of taxation, but of how we can retain top executives in this country. This is what the country needs. If matters go on as they are doing, the situation will go from bad to worse.
I have put my name to an Amendment put forward by my hon. Friend the Member for Crosby (Mr. Graham Page). Any Amendment put down by him is always faultless. I have never 476 known the Government to try to catch him out on the wording, and, since they cannot do that, they have tried another trick. They say that they could never agree to 60 per cent. and that it should be more.
I know from practical experience how often at board meetings we have to go into a sub-committee to discuss taxation, and how much time is wasted in talking about the effects of taxation. I know that if I come to my hobby horse of S.E.T. I shall be ruled out of order, so I will refrain from doing so, as it would be too much for your patience, Mr. Speaker. Why it takes so long in industry to work out the taxation position and why it is necessary to consult so many learned experts is because the legislation is so badly drawn up that nobody can understand it, not even the Departments.
The Amendment makes clear what is meant by "substantially the whole". Where a company by doing certain acts gets tax relief, it will be no surprise to the Chancellor to hear that the board of that company goes to incredible trouble to see that the company does not step out of form and so lose the taxation relief. My hon. Friend the Member for Crosby made the point that a trading company which received substantially the whole of its income from overseas should have liquid reserves. It is to the benefit of the Chancellor and of local authorities that those liquid reserves are put on short-term loan to local authorities, as they are in a well-organised company. Goodness knows, the local authorities want it.
The Chief Secretary made confusion more confounded when he said that he wanted more than 60 per cent. This will put every board in confusion; they will not know what he means by that. Surely it is not beyond the wit of man and beyond the intelligence of the Treasury to insert a simple figure, as was done in the legislation dealing with building societies. Why will he not say what he means?
If Mr. Speaker would accept a manuscript Amendment, I am sure that my hon. Friend would be prepared to do a bit of horse-trading on the 60 per cent., but it is essential that a figure should be specified. The Government have an opportunity here to encourage top executives. If they do not take it there will be 477 another year with a bigger brain drain and it will take that much longer for the Conservatives to put matters right.
§ Mr. Stanley R. McMaster (Belfast, East)
My colleagues on this side have laid emphasis on the brain drain, but I would like to ask the Chief Secretary about another aspect of the Amendment which concerns the very arbitrary 5 per cent. If a young executive takes an interest of less than 5 per cent. in a close company, why when he is borrowing money at the high current rates should he be excluded from the provisions of the Amendment?
There are many different types of close company. Some are professional partnerships with a small capital and others, particularly the merchant banks in the City of London, have very substantial capital, and one could not expect a young executive to raise enough money to invest more than 5 per cent. in such a company.
As was shown during Question Time today, close companies contribute to our invisible earnings and to the overseas trade balance of the country, and if it is the purpose of the Government to encourage executives working in such companies to take a share in the risk in the company and so to further the interests of the country, those executives should surely be entitled to offset the interest on their overdraft against any earnings from their investment in the company. The executives are taking a substantial risk. Not only do their job and their livelihood depend on the company but also their capital. If the company should fail, the man loses not only his job and income but also his savings, and may even have to mortgage the future.
The figure of 5 per cent. is arbitrary and meaningless and should be abandoned. If it is the purpose of the Chancellor to encourage young executives to take an interest in their companies and so to create flexible companies rather than large established companies in which the executive is almost prevented from taking an interest and where the partners are growing older, taking less interest and dying, the young executives should be given every encouragement to take even a 1 per cent. or a 2 per cent. interest and to borrow money for this purpose.
I hope that the Chancellor of the Exchequer or the Chief Secretary will deal 478 more fully with this point and will explain why, when the 5 per cent. might be a matter of a few thousand £s, tens of thousands of £s or, in the case of merchant banks over £100,000, a young executive investing less than 5 per cent. should not obtain the advantage proposed in the Amendment.
§ 7.0 p.m.
§ Mr. Iain Macleod
On a point of order. We asked, Mr. Speaker, whether you would allow a separate Division if a particular request was made. Naturally, these two Clauses are in principle agreeable to us. Much of the criticism has centred on Amendment (k) on page 6717, in the name of my hon. Friend the Member for St. Ives (Mr. Nott), in line 20, to leave out the word "material". It has the effect of removing the minimum of 5 per cent. from new Clause 33. For the convenience of the House, would you agree to call Amendment (k) for a separate Division?
§ Mr. Speaker
I have the sense of the debate. The right hon. Gentleman has made a fair request. I will allow a Division on Amendment (k). It will take place after the Second Reading of the Clause.
§ Mr. Temple
Some weeks ago I rang my accountant to ask him whether he would care to express an opinion on this disallowance of loan interest. He is a wise man, and he said, "Not until the Finance Bill is finalised". But I do not think that even my accountant thought that close companies would be put into a special category. My hon. Friend the Member for Acton (Mr. Kenneth Baker) asked why close companies had been picked out—was it because they were small or had some special status? It was neither of those things.
I put a couple of points to the Chief Secretary which are quite new in this debate. In former years the Chief Secretary was an accountant—he is still, of course, an accountant, although not practising—and no doubt in his time he has signed a balance sheet certifying that a certain company is a close company. One does not know the status of a company until long after the year has finished and it has been determined to what extent controlling shareholders have controlling interests.
479 I make this point quite seriously to the Chancellor of the Exchequer. For the purposes of encouraging young executives, who will be allowed loan interest only so long as they take up shares in a close company and so long as they have over 5 per cent. of the shareholding, the controlling shareholders of certain companies may think, "We must retain the close company status because if we become a public company this practice will not be permitted to continue". I do not know whether I am wrong; the Clause is extremely complicated, but this is how I read it.
Reference has already been made to the complexities of the legislation. In business today the advice of the accountant is probably the most important advice a company receives. If a company wishes to encourage junior executives, it has to devise some kind of financial structure to fit the particular criteria laid down in the new Clause. To take as an example a large close company in which a 5 per cent. interest would comprise a substantial interest, without changing the underlying status of the company or companies structure an up-and-coming executive could not normally acquire a 5 per cent. interest because the sum he would require to pay would be too large. So what would happen? There would probably be a meeting with accountants and advisers to devise a complicated structure of underlying close companies in which the executive would work. All that would bring the particular close company within the ambit of this Clause and within the scope of the financial status of the executive whom the company wanted to encourage.
Is it worth all the trouble of devising a Clause which is entirely directed to close companies? Why not enable the Clause to be directed equally to limited or unlimited companies? I believe I am the only hon. Member who has spoken about unlimited company status. In the world in which I move, the comparatively small company world, a number of people at the moment are changing their companies from close companies to unlimited companies. They are getting away from what are termed the shackles of the close company status, but on this basis they will not have the advantage of bringing in their executives. 480 I put this forward as a serious point, and I hope that the Chief Secretary will be able to give us an answer.
§ Mr. Diamond
When the right hon. Gentleman the Member for Enfield, West (Mr. Iain Macleod) spoke on the Clause, he was good enough, in his usual gracious manner, to express appreciation for the way in which in Committee we had listened to the arguments put forward from both sides and had attempted to meet them, as far as we could, within the philosophy of the new scheme. He said that he thought it was unique. I share that view. It is a tribute to the fact that the procedure was devoted more to persuading a Government who were willing to listen to argument than to wearing down a Government who were unwilling to be worn down. To the extent that the procedure has worked well, I, too, am pleased. I feel that it was an improvement in our democratic procedure.
The right hon. Member's expression of appreciation was echoed, in perhaps less persuasive terms, by other hon. Members. But then we began to find ourselves in the difficulty that the argument was increasingly put forward that, although we had been willing to listen to the arguments and to put forward proposals such as the two new Clauses which we are now considering and which met a great deal of the argument put forward, we were, by so doing, rendering the situation more anomalous than it was previously and were departing from the strict logic of the original proposals.
We were to a certain extent, in relation to close corporations, departing only from the strict logic of the original proposals. My recollection may be at fault, but I do not recollect a single speech in Committee that these kinds of proposals were being urged to suggest that, if we acceded to these pressures, we should be departing from the logic of the case and should be creating increasing anomalies.
I am aware of arguments which are now being put forward that we should make further concessions to render the Bill even more anomalous so that hon. Members opposite could make the point with some justification which they cannot at the moment make—
§ Mr. Temple
The right hon. Gentleman is now alleging that all these various arguments were not put forward in Committee. I would remind him that in this particular instance it was a unique Finance Bill Committee in that it was a very small Committee indeed. All other Finance Bills have been taken either in Committee of the House or in a very large Standing Committee. Therefore, it is possible that many of the arguments which have been adduced today were not put in Committee.
§ Mr. Diamond
I was not making that point and, though I would agree that it was a select Committee, it was selected in a rather different way from that which the hon. Gentleman suggested.
I have been asked what is the cost of the new proposals. I shall attempt to deal with the question, although it is never very easy to give precise figures. Before dealing with it, however, the one point which has arisen time and time again is the financial cost. What has been totally omitted and what was the main argument put forward when the Chancellor announced these proposals is the demand effect, which was expected to be considerable. That was a major argument in the proposals, and we see no reason to change our views about that aspect. The indications available to the House seem to be that the proposals which we have made have registered in the minds of the borrowing public.
I turn, then, to deal with the cost. It is not possible to answer with precision the questions which have been put to me about cost. It would be wiser not to give a figure. Instead, I will give an indication of the scale. I hope that I shall help the House if I say that, broadly, the proposals which we are putting forward in relation to estate duty, partnerships and close corporations—I do not include the proposals in relation to the five-year extension of commitments—would cost of the order of £3 million, approximately half of it to the estate duty proposals and half to the partnership and close corporation proposals.
My hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) asked me if I could split that figure in relation to surtax. I am afraid that I could not. 482 It would be extremely small. My hon. Friend talked about surtax payers contributing £5 million. However, the £5 million of the £25 million total was in relation to surtax and not necessarily to surtax payers. I am sure that my hon. Friend recognises the difference. That is why it is smaller that he might otherwise have thought. I am sorry if I did not make that distinction sufficiently clear on an earlier occasion.
I turn now to the generality of the complaint rather than the reception which one always expects when one meets pressures which are made in Committee. I have detected practically no criticism on the proposals relating to partnership. The criticisms are related almost exclusively to the extension of the proposals to close corporations, in particular to the definition of the working proprietor in the close corporation as being one owning 5 per cent. or more.
I recognise that there is an enormous amount to digest in these proposals. It is very difficult to have new proposals of this magnitude put forward at short notice. In trying to meet the convenience of the House, we could not carry out our responsibilities fully having regard to the timetable and the wishes of hon. Members generally not to spend the whole of August attending to their duties in this House. There has been an enormous amount to digest, and perhaps it will be convenient if I go over the argument which I put forward a little earlier.
I do not recognise a departure from principle. There is only one principle in the whole issue. It is what is business interest and what is private interest. A business interest is readily recognised in the case of a single proprietor or sole trader. To move from a sole trader to a partnership is an obvious next step. Although by far the majority of partnerships borrow money for their business purposes as partnerships, occasionally an individual partner may wish to borrow for perfectly good reasons. I gather that the House does not dissent from the view that, if one is to have a regime of this kind, it is sensible to extend the principle to an individual partner providing capital for the partnership by borrowing and to give relief on the loan interest for tax purposes.
483 I have started with those areas where the House is broadly in agreement. I come now to the area where there is a measure of disagreement, and I turn to what I regard as a reliable authority in this House, the hon. and learned Member for Northwich (Sir J. Foster). He said in a most helpful speech that, when talking about a family business, it is impossible to distinguish between a sole trader, a partnership and a close corporation, and he added that a family business will take on one of those three forms. I agree. It does.
I agree with those who say that the logic of the case is not as solid as it was or would have been if we had stuck to the sole trader or the partnership. In an attempt to meet what I regard as the common sense of the proposals put forward in Committee, I have moved deliberately to saying that one cannot distinguish between the sole trader, the partnership and the close corporation in the case of a family business and that, therefore, it would be right and sensible to include the working proprietor who decides to run his business under the structure of a sole trader, of a partnership or of a close corporation.
In all cases, there is essentially the element of a very close integration between ownership and management. That is what a close corporation really means. It is distinguished from a non-close corporation where management and ownership are broadly distinct. Therefore, I thought it right to bring forward proposals based on the common sense extension of the principle, or what the hon. Member for St. Ives (Mr. Nott) called theeasing of the rigidity of the schemeas originally proposed.
I have repeated this argument so as to distinguish it from the case of those who put forward an entirely different principle that we should seek to assist and to prefer in relation to other taxpayers those young executives in companies of all kinds who, it is thought, should be enabled to acquire a stake, essentially small to begin with, in their companies and should be given some tax advantage which is not open to other taxpayers in order to encourage them to achieve that end.
484 That is not the point with which I am dealing, and it is not claimed that we are preferring them. They have not been preferred previously, and they are not being preferred now. I am dealing with a simple extension of the business interest concept, and that is the reason why we come to some little difficulty in trying to associate that concept with a close corporation and work within the rules of a close corporation, which is, after all, a corporate body. Therefore, we have to find appropriate rules for defining the working proprietor in a close corporation.
No matter what figure is chosen, someone can easily make a speech saying, "How ridiculous it is to have a certain figure qualifying and half per cent. below that non-qualifying". I dare say that I could scratch my brain and recollect an occasion, when in Opposition, on which I have fallen into this error. It is easy to make that kind of speech, but we all know in our serious moments that we must have some kind of definition.
I have listened to five speeches insisting that there should be a closer definition of the 60 per cent. dealt with in the Amendment in the name of the hon. Member for Crosby (Mr. Graham Page). We must have some kind of definition so that people know where they stand. The definition that we have taken is that which is hallowed by the authority of this House by Governments of both parties over the years.
It is no use the right hon. Member for Enfield, West shaking his head. His recollection cannot be worse than mine. I remember the number of most acceptable speeches that he made. He put all my courtesy to shame. However, one would not believe it listening to him now. He is the most courteous person in this House, and can make one feel that whatever one says is wrong. The right hon. Gentleman was Financial Secretary and Economic Secretary in the Government which supported these proposals, so he should not shake his head in a negative way he should be shaking it up and down. We have, therefore, adopted a very well-known rule, which goes back to excess profits tax, to profits tax and to corporation tax, namely, the rule of 5 per cent.
No one has said that if we are to have a percentage we could do better. 485 Many hon. Members have said that a percentage by itself is not a good criterion. Therefore, what is being suggested, although it is implicit rather than explicit, is that we should have a double definition, both a percentage and an absolute figure, for the reason that a small percentage in a large firm is a large amount and a small percentage in a small firm is a small amount.
These arguments have been gone over. There is no reason why we should not consider how these proposals work out in the course of the coming year to see whether we want to make the matter even more complicated—I repeat, even more complicated—because most of the pressures are to make proposals more complex to fit so many different individuals with more precision. There is no reason why we should not see how these proposals work out and how essential it is to have a double definition. I do not rule out the possibility of examining it in the coming year. But if we are to have a definition, I think that it had better be the one which has been accepted by both parties for so long.
§ Sir J. Foster
The right hon. Gentleman is always intellectually honest. However, he has not met the argument that there is no need for a percentage in this context. We have proposed that if a man works whole-time for a company he should be able to get a loan and have the interest deducted on any percentage. There is no need for double definition.
§ Mr. Diamond
I always respect and listen carefully to what the hon. and learned Gentleman says, but I find it difficult to contemplate any definition of a working proprietor which does not define, even in a minimum way, his proprietorship. That is what we are basing our case on and that is what we are moving from in the case of the sole trader and the partnership. I do not think that we should ever be able to do without a definition of that kind.
§ Mr. Costain
Is not the important thing the percentage of the individual's holding in a company? If the right hon. Gentleman wants to stop a portfolio investment—that is what he is really after —is it not better to say that, provided the man has a greater percentage on 486 portfolio in the firm that he is working for, he should be a proprietor?
§ Mr. Diamond
No. In terms of the other aspects of this new proposal about withdrawing relief from interest on borrowings, we have decided not to give relief to those who borrow to speculate or to invest in a general way. Real saving consists of saving money and using it, when accumulated, for investment or buying shares in smaller amounts. To borrow to invest in equal amounts can hardly be called saving at that point of time.
Without going over all the arguments again, it will be realised that I find it difficult to depart from the logical extension of the case of the sole proprietor to one who has a combined substantial proprietorial and managing interest in a close corporation. That is the proposal in the Bill. That is the reason why I find it impossible to accept the Amendments that have been put forward, particularly the Amendment singled out by the right hon. Gentleman because of its importance.
§ Mr. Kenneth Baker
Will the right hon. Gentleman answer the question which I and other hon. Members raised where a director has 10 per cent. or more of the interest in a close company which is quoted on the Stock Exchange and a lot of money is involved, but which remains a close company? Is that director, who may have borrowed a lot of money for his 10 per cent., still allowed to offset the interest on the loan against his income? If so, how does he differ from an ordinary shareholder who is not so allowed?
§ Mr. Diamond
If it is a close corporation the relief will apply. If it ceases to be a close corporation the relief will cease to apply.
The hon. Member for Acton (Mr. Kenneth Baker) made a very persuasive speech. He tried to persuade me that I should not extend the principle applied to sole proprietors and partnerships to close corporations. If we are right to do so in a nonsensical way, to do so in a way which is lacking in rigidity and in a way which is helpful in meeting the main arguments which were put, I hope that the House will feel—
§ Mr. Barnett
My right hon. Friend has not answered the main point. I 487 accept that he was right to treat close companies or, to use his new phrase, close corporations, in the same way as partnerships and individual traders. But why is it not sufficient to have it without the 5 per cent?
§ Mr. Diamond
I will try again, because I am anxious to get the wholehearted and full-throated support of my hon. Friends on all occasions. A proprietor must have a stake in the business or he would not be a proprietor. The question, therefore, if we are to have a percentage, is what it should be—[Interruption.] If we do not have a percentage, we have an amount. But it is convenient to deal with it by way of percentage. Other Governments have found that. If we are to have an amount it is better for it to be expressed as a percentage because a percentage is related to the concept of a close company. A close company is based and defined by adding up the percentage of the shares which the various members have. A close company is under the control of a small number of individuals—five or less—and the calculation is made by counting the number of shares and seeing what the percentage is. That is what constitutes control. I therefore explain why it is necessary, if we are to have a proprietorial concept at all, that it had better be in the form of a percentage. If it is to be a percentage of the amount, what can we have smaller than 5 per cent.?
§ 7.30 p.m.
§ Mr. Diamond
But then, one has nothing to support the 4 per cent. My hon. Friend will realise that the figure of 5 per cent. is a figure which has worked, which has support and legal interpretation, and I think that it is the natural figure to be adopted in present circumstances.
§ Mr. Graham Page
Is the right hon. Gentleman going to say nothing about the phrase "substantially the whole" and about the close company with overseas subsidiaries?
§ Mr. Diamond
I apologise to the hon. Gentleman for the fact that I did not deal with those two points. On the phrase "substantially the whole", he disclosed 488 that he has an interest in a company and that he is interested in whether 60 per cent. would get by. I have answered in clear terms that 60 per cent. would not get by—
§ Mr. Diamond
As his hon. Friend says, if the board knew what would get by, the board would take steps to see that it complied with what would get by—[Interruption.] I am only quoting his hon. Friend. Therefore, to help the hon. Gentleman, I will be as precise as I can. But it is clear that words of mine, as he knows better than anyone else, have no effect on interpreting the law in the courts. However, so far as the administration is concerned, the Revenue would not regard 60 per cent. as satisfactory. It would regard a figure well in excess of 75 per cent. as satisfactory, having regard to all the other circumstances.
The hon. Gentleman made it clear from the description which he gave that there are different circumstances applying to different companies and to the same company at different times of the year. It may be clear that there would be investments of liquid resources which would vary from time to time. So the hon. Gentleman realises that it would be impossible to lay down a precise figure. Above that, no matter how it changes during the year, a company qualifies, and below that, it does not. The sensible thing is to adopt words which have been interpreted, which are the words in the Clause.
The hon. Gentleman's second question was, why do we not give the relief to cornpanies which are not wholly resident in the United Kingdom and not wholly subject to United Kingdom tax? We do not do that in respect of any part of the income tax laws, as he knows from all the arguments in which he has taken part. One can control the situation only where all the profits are subject to United Kingdom tax, and where part are not in the group, one cannot take them into account.
Secondly, where there is a subsidiary or sub-subsidiary, which is partly investment and partly rents, property, it is impossible to say with regard to a remittance from that subsidiary to its parent what the nature of that remittance is—whether it is one or the other or part of each. Therefore, the distinction which he seeks to make is just impracticable. It is for those 489 reasons that the Amendments which the hon. Member has put forward, I regret, are not acceptable.
§ Mr. Higgins
My right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) has already said that we are glad that the new Clause has been brought forward. There has been some discussion whether this should be termed a concession by the Government. It should be regarded both as a victory for the Opposition and, more particularly, as a victory for common sense.
But I cannot go along with the Chief Secretary's view that he is now departing slightly from the strict logic of his proposals, because his proposals had virtually no logic about them in the first place. He said that we did not dispute this in Committee; yet in col. 351 I said quite clearly that his proposals were grossly unfair. He said that there was nothing that one could do to prevent it, although he has tried to do so in the new Clause. I went on:In fact, there is something one can do to prevent it. One can throw out the whole Clause."—[OFFICIAI, REPORT, Standing Committee F, 18th June, 1969; c. 351.]Although we concede that the Government's proposals in the new Clause do something to rectify the initial position which they created, which can best be described as the incomprehensible concealing the indefensible, they still do not go far enough. The Government's initial proposal, which the Chancellor put forward in his Budget speech, was a typical shotgun measure, battering the whole target to hit one particular case to which the Chancellor objected, and what we are engaged in now is picking out the pellets from one or two people who the Chancellor feels would suffer particularly badly as a result of his initial widespread attack across the whole field of activity.
§ Therefore, the point of principle which has been isolated today is not the Chief Secretary's sudden conversion from drawing the line where he says that it has always been drawn—now in a totally different place—but this sacred concept, which he has thought up between Committee and Report, of a 5 per cent. interest in close company. The Chief Secretary says that there has been general agreement on this 5 per cent. But that is for totally different purposes than the purposes for which he is now using it. He is trying to achieve a reduction in borrowing, but if he sets a limit of 5 per cent., there will be a considerable incentive for many people with an interest in a company of somewhat less than 5 per cent. not to borrow less but actually to borrow more.
§ Therefore, it is clear that the Chief Secretary should not have sought to sit on this very fine dividing line, which, like the earlier ones which he sought to define, is quite indefensible. He should go back and give up the whole proposal in the Budget speech, because it cannot be reconciled either in logic or in equity. Therefore, I hope that my hon. Friend the Member for St. Ives (Mr. Nott) will move his Amendment to the new Clause, on which we might have a separate Division. While we appreciate that new Clause as such, we hope that my hon. Friend's Amendment will be carried.
§ Question put and agreed to.
§ Clause read a Second time.
§ Amendment proposed to the proposed Clause: in line 20, leave out 'material'. —[Mr. Nott.]
§ Question put, That the Amendment be made.
§ The House divided: Ayes 187, Noes 241.493
|Division No. 328.]||AYES||[7.38 p.m.|
|Alison, Michael (Barkston Ash)||Biggs-Davison, John||Channon, H. P. G.|
|Allason, James (Hemel Hempstead)||Birch, Rt. Hn. Nigel||Chichester-Clark, R.|
|Amery, Rt. Hn. Julian||Black, Sir Cyril||Clark, Henry|
|Astor, John||Body, Richard||Clegg, Walter|
|Atkins, Humphrey (M't'n & M'd'n)||Boyle, Rt. Hn. Sir Edward||Cooke, Robert|
|Awdry, Daniel||Brinton, Sir Tatton||Cooper-Key, Sir Neill|
|Baker, Kenneth (Acton)||Brown, Sir Edward (Bath)||Cordle, John|
|Baker, W. H. K. (Banff)||Bruce-Gardyne, J.||Costain, A. P.|
|Batsford, Brian||Bryan, Paul||Crouch, David|
|Beamish, Col. Sir Tufton||Buchanan-Smith, Alick (Angus,N&M)||Cunningham, Sir Knox|
|Bell, Ronald||Buck, Antony (Colchester)||Currie, G. B. H.|
|Bennett, Sir Frederic (Torquay)||Bullus, Sir Eric||Dalkeith, Earl of|
|Berry, Hn. Anthony||Campbell, B. (Oldham, W )||Dance, James|
|Bessell, Peter||Campbell, Gordon (Moray & Nairn)||Davidson, James (Aberdeetishire, W.)|
|Biffen, John||Carr, Rt. Hn. Robert||d'Avigdor-Goldsmid, Sir Henry|
|Deedes, Rt. Hn. W. F. (Ashford)||Kirk, Peter||Rawlinson, Rt. Hn. Sir Peter|
|Digby, Simon Wingfield||Kitson, Timothy||Rees-Davies, W. R.|
|Dodds-Parker, Douglas||Lambton, Viscount||Renton, Rt. Hn, Sir David|
|Doughty, Charles||Lancaster, Col. C. G.||Rhys Williams, Sir Brandon|
|du Cann, Rt. Hn. Edward||Legge-Bourke, Sir Harry||Rossi, Hugh (Hornsey)|
|Elliot, Capt. Walter (Carshalton)||Lewis, Kenneth (Rutland)||Russell, Sir Ronald|
|Errington, Sir Eric||Lubbock, Eric||St. John-Stevas, Norman|
|Eyre, Reginald||McAdden, Sir Stephen||Scott, Nicholas|
|Farr, John||MacArthur, Ian||Scott-Hopkins, James|
|Fisher, Nigel||Mackenzie, Alasdair (Ross&Crom'ty||Sharples, Richard|
|Fletcher-Cooke, Charles||Maclean, Sir Fitzroy||Shaw, Michael (Sc'b'gh & Whitby)|
|Fortescue, Tim||Macleod, Rt. Hn. Iain||Silvester, Frederick|
|Foster, Sir John||McMaster, Stanley||Sinclair, Sir George|
|Fraser, Rt.Hn.Hugh(St'fford & Stone]||McNair-Wilson, Michael||Smith, Dudley (W'wick & L'mington)|
|Gilmour, Sir John (Fife, E.)||McNair-Wilson, Patrick (NewForest)||Smith, John (London & W'minster)|
|Glover, Sir Douglas||Maginnis, John E.||Speed, Keith|
|Glyn, Sir Richard||Marples, Rt. Hn. Ernest||Stainton, Keith|
|Godber, Rt. Hn. J. B.||Marten, Neil||Steel, David (Roxburgh)|
|Goodhart, Philip||Maude, Angus||Stodart, Anthony|
|Goodhew, Victor||Maxwell-Hyslop, R. J.||Stoddart-Scott, Col. Sir M.|
|Gower, Raymond||Mills, Peter (Torrington)||Tapsell, Peter|
|Grimond, Rt. Hn. J.||Mills, Stratton (Belfast, N.)||Taylor, Edward M.(G'gow,Cathcart)|
|Gurden, Harold||Montgomery, Fergus||Temple, John M.|
|Hall-Davis, A. G. F.||More, Jasper||Thatcher, Mrs. Margaret|
|Hamilton, Michael (Salisbury)||Morrison, Charles (Devizes)||Tilney, John|
|Harris, Frederic (Croydon, N.W.)||Mott-Radclyffe, Sir Charles||Turton, Rt. Hn. R. H.|
|Harris, Reader (Heston)||Munro-Lucas-Tooth, Sir Hugh||van Straubenzee, W. R.|
|Harrison, Brian (Maldon)||Murton, Oscar||Vickers, Dame Joan|
|Harvie Anderson, Miss||Nabarro, Sir Gerald||Waddington, David|
|Hawkins, Paul||Noble, Rt. Hn. Michael||Wainwright, Richard (Colne Valley)|
|Hay, John||Nott, John||Walker, Peter (Worcester)|
|Heald, Rt. Hn. Sir Lionel||Onslow, Cranley||Walker-Smith, Rt. Hn. Sir Derek|
|Heseltine, Michael||Orr, Capt. L P. S.||Ward, Dame Irene|
|Higgins, Terence L.||Osborne, Sir Cyril (Louth)||Wells, John (Maidstone)|
|Hiley, Joseph||Page, Graham (Crosby)||Whitelaw, Rt. Hn. William|
|Hill, J. E. B.||Page, John (Harrow, W.)||Wiggin, A. W.|
|Holland, Philip||Pardoe, John||Williams, Donald (Dudley)|
|Hordern, Peter||Pearson, Sir Frank (Clitheroe)||Wilson, Geoffrey (Truro)|
|Hornby, Richard||Peel, John||Wolrige-Gordon, Patrick|
|Howell, David (Guildford)||Percival, Ian||Wood, Rt. Hn. Richard|
|Hunt, John||Pike, Miss Mervyn||Woodnutt, Mark|
|Hutchison, Michael Clark||Pink, R. Bonner||Worsley, Marcus|
|Iremonger, T. L.||Pounder, Rafton||Wylie, N. R.|
|Jenkin, Patrick (Woodford)||Powell, Rt. Hn. J. Enoch||Younger, Hn. George|
|Jopling, Michael||Price, David (Eastleigh)||TELLERS FOR THE AYES:|
|Joseph, Rt. Hn. Sir Keith||Prior, J, M. L.||Mr. Anthony Grant and Mr. Hector Monro.|
|Kerby, Capt. Henry||Pym, Francis|
|Kershaw, Anthony||Quennell, Miss J. M.|
|King, Evelyn (Dorset, S.)||Ramsden, Rt. Hn. James|
|Abse, Leo||Chapman, Donald||Ensor, David|
|Albu, Austen||Concannon, J. D.||Evans, Fred (Caerphilly)|
|Allaun, Frank (Salford, E.)||Conlan, Bernard||Faulds, Andrew|
|Alldritt, Walter||Craddock, George (Bradford, S.)||Fernyhough, E.|
|Anderson, Donald||Crawshaw, Richard||Finch, Harold|
|Armstrong, Ernest||Crosland, Rt. Hn. Anthony||Fitch, Alan (Wigan)|
|Ashton, Joe (Bassetlaw)||Crossman, Rt. Hn. Richard||Fletcher,Rt.Hn.Sir Eric(Islington,E.)|
|Atkins, Ronald (Preston, N.)||Dalyell, Tam||Fletcher, Raymond (Ilkeston)|
|Bacon, Rt. Hn. Alice||Darling, Rt. Hn. George||Fletcher, Ted (Darlington)|
|Baxter, William||Davies, G. Elfed (Rhondda, E.)||Foley, Maurice|
|Beaney, Alan||Davies, Dr. Ernest (Stretford)||Foot, Michael (Ebbw Vale)|
|Bence, Cyril||Davies, Rt. Hn. Harold (Leek)||Forrester, John|
|Benn, Rt. Hn. Anthony Wedgwood||Davies, Ifor (Gower)||Fowler, Gerry|
|Bidwell, Sydney||de Freitas, Rt. Hn. Sir Geoffrey||Fraser, John (Norwood)|
|Bishop, E. S.||Delargy, Hugh||Freeson, Reginald|
|Blackburn, F.||Dell, Edmund||Galpern, Sir Myer|
|Boardman, H. (Leigh)||Dempsey, James||Gardner, Tony|
|Booth. Albert||Dewar, Donald||Garrett, W. E.|
|Bottomley, Rt. Hn. Arthur||Diamond, Rt. Hn. John||Ginsburg, David|
|Boyden, James||Dickens, James||Gordon Walker, Rt. Hn. P. C.|
|Bradley, Tom||Dobson, Ray||Gray, Dr. Hugh (Yarmouth)|
|Bray, Dr. Jeremy||Doig, Peter||Grey, Charles (Durham)|
|Brown, Hugh D. (G'gow, Provan)||Driberg, Tom||Griffiths, Eddie (Brightside)|
|Brown,Bob(N' c' tle-upon-Tyne, W.)||Dunn, James A.||Griffiths, Will (Exchange)|
|Brown, R. W. (Shorcditch & F'bury)||Dunwoody, Mrs. Gwyneth (Exeter)||Hamilton, James (Bothwell)|
|Buchan, Norman||Eadie, Alex||Hamilton, William (Fife, W.)|
|Buchanan, Richard (G'gow, Sp'burn)||Edwards, Robert (Bilston)||Hannan, William|
|Butler, Herbert (Hackney, C.)||Edwards, William (Merioneth)||Harrison, Walter (Wakefield)|
|Butler, Mrs. Joyce (Wood Green)||Ellis, John||Hart, Rt. Hn. Judith|
|Cant, R. B.||English, Michael||Haseldine, Norman|
|Carter-Jones, Lewis||Ennals, David||Hattersley, Roy|
|Hazell, Bert||MacMillan, Malcolm (Western Isles)||Randall, Harry|
|Heffer, Eric S.||McNamara, J. Kevin||Rankin, John|
|Henig, Stanley||Mahon, Peter (Preston, S.)||Rees, Merlyn|
|Hilton, W. S.||Mahon, Simon (Bootle)||Richard, Ivor|
|Hooley, Frank||Mallalicu,J.P.W.(Huddersfield,E.)||Roberts, Albert (Normanton)|
|Houghton, Rt. Hn. Douglas||Manuel, Archie||Roberts, Gwilym (Bedfordshire, S.)|
|Howarth, Harry (Wellingborough)||Mapp, Charles||Robinson, Rt.Hn.Kenneth(St.P'c'as)|
|Howarth, Robert (Bolton, E.)||Marquand, David||Rodgers, William (Stockton)|
|Howie, w.||Mason, Rt. Hn. Roy||Rogers, George (Kensington, N.)|
|Hoy, Rt. Hn. James||Maxwell, Robert||Ross, Rt. Hn. William|
|Hughes, Rt. Hn. Cledwyn (Anglesey)||Mellish, Rt. Hn. Robert||Ryan, John|
|Hughes, Hector (Aberdeen, N.)||Mendelson, John||Shaw, Arnold (Ilford, S.)|
|Hughes, Roy (Newport)||Mikardo, Ian||Short, Rt.Hn.Edward(N'c'tle-u-Tyne)|
|Hunter, Adam||Millan, Bruce||Silkin, Rt. Hn. John (Deptord)|
|Irvine, Sir Arthur (Edge Hill)||Miller, Dr. M. S.||Silkin, Hn. S. C. (Dulwich)|
|Jackson, Peter M. (High Peak)||Milne, Edward (Blyth)||Slater, Joseph|
|Jay, Rt. Hn. Douglas||Mitchetl, R. C. (S'th'pton, Test)||Small, William|
|Jeger,Mrs.Lena(H'b'n&St.P'cras,S.)||Molloy, William||Snow, Julian|
|Jenkins, Hugh (Putney)||Moonman, Eric||Spriggs, Leslie|
|Jenkins, Rt. Hn. Roy (Stechford)||Morgan, Elystan (Cardiganshire)||Steele, Thomas (Dunbartonshire, W.)|
|Johnson, Carol (Lewisham, S.)||Morris, Alfred (Wythemhawe)||Strauss, Rt. Hn. G. R.|
|Jones, Dan (Burnley)||Morris, Charles R. (Openshaw)||Symonds, J. B.|
|Jones, Rt.Hn.Sir Elwyn(W.Ham,S.)||Morris, John (Aberavon)||Taveme, Dick|
|Jones, J. Idwal (Wrexham)||Moyle, Roland||Thomas, Rt. Hn, George|
|Jones, T. Alec (Rhondda, West)||Mulley, Rt. Hn. Frederick||Thomson, Rt. Hn. George|
|Judd, Frank||Murray, Albert||Thornton, Ernest|
|Kelley, Richard||Neal, Harold||Tinn, James|
|Kenyon, Clifford||Newens, Stan||Tomney, Frank|
|Kerr Mrs. Anne (R'ter & Chatham)||Noel-Baker,Rt.Hn.Philip||Tuck, Raphael|
|Kerr, Russell (Feltham)||Ogden, Eric||Urwin, T. W.|
|Lawson, George||O'Malley, Brian||Walker, Harold (Doncaster)|
|Leadbitter, Ted||Orbach, Maurice||Wallace, George|
|Lee, Rt. Hn. Frederick (Newton)||Oswald, Thomas||Watkins, David (Consett)|
|Lee, Rt. Hn. Jennie (Cannock)||Owen, Dr. David (Plymouth, S'tn)||Watkins, Tudor (Brecon & Radnor)|
|Lee, John (Reading)||Owen, Will (Morpeth)||Weitzman, David|
|Lever, Rt. Hn. Harold (Cheetham)||Page, Derek (King's Lynn)||Wellbeloved, James|
|Lewis, Arthur (W. Ham, N.)||Palmer, Arthur||Whitaker, Ben|
|Lewis, Ron (Carlisle)||Pannell, Rt. Hn. Charles||Wilkins, W. A.|
|Lomas, Kenneth||Park, Trevor||Willey, Rt. Hn. Frederick|
|Lougilin, Charles||Parker, John (Dagenham)||Williams, Alan Lee (Hornchurch)|
|Luard, Evan||Parkyn, Brian (Bedford)||Williams, Clifford (Abertillery)|
|Mabon, Dr. J. Dickson||Pavitt, Laurence||Williams, Mrs. Shirley (Hitchin)|
|McBride, Neil||Pearson, Arthur (Pontypridd)||Willis, Rt. Hn. George|
|MacColl, James||Pentland, Norman||Wilson, William (Coventry, S.)|
|Macdonald, A. H.||Perry, Ernest G. (Battersea, S.)||Winnick, David|
|McGuire, Michael||Perry, George H. (Nottingham, S.)||Woodburn, Rt. Hn. A.|
|McKay, Mrs. Margaret||Prentice, Rt. Hn. Reg||Woof, Robert|
|Mackenzie, Gregor (Rutherglen)||Price, Christopher (Perry Bar)||TELLERS FOR THE NOES:|
|Mackie, John||Price, Thomas (Westhoughton)||Mr. Joseph Harper and Mr. John McCann.|
|Mackintosh, John P.||Price, William (Rugby)|
|Maclennan, Robert||Probert, Arthur|
§ Clause added to the Bill.