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Free Loans, Etc

Volume 887: debated on Thursday 6 March 1975

The text on this page has been created from Hansard archive content, it may contain typographical errors.

I beg to move Amendment No. 92, in page 30, line 35, at end insert

'but no period beginning before 6th April 1976 shall be a chargeable period'.

With this amendment I think that it would be convenient to discuss amendment (a) to this amendment, in line 2, leave out '1976' and insert '1980'.

We may also discuss the following amendments:

No. 415, in page 30, line 20, at end add
', subject to subsections (3) to (5) below,';
No. 416, in page 30, line 31, at end add
'which shall be deemed to include the value transferred'.
No. 91, in page 30, line 31, at end insert—
'Provided that this subsection shall not apply when a person allows another person the use of a dwelling house free, or for a lesser consideration than might reasonably have been expected'.
No. 438, in page 30, line 31, at end insert—
'( ) For the avoidance of doubt it is hereby declared that a dividend waiver is not a transfer of value'.
No. 419, in page 30, line 35, at end add—
'(3) Subsection (1) of this section shall not apply in relation to any loan to or to the allowance of the use of money or other property to, any unincorporated business or any company carrying on a business, if—
  • (a) the person who apart from this subsection would be treated as the transferor is—
  • (i) engaged in that business either alone or in partnership, or
  • (ii) (in relation to a company) a director or shareholder or full-time employee of the company in question, or
  • (iii) any person who is connected to any such person as is specified in subparagraphs (i) and (ii) of this subsection within the meaning of subsection (4) of section 48 of this Act; and
  • (b) the business in question is one falling within the definition of sub-paragraph (6) of paragraph 14 of Schedule 4 to this Act.
  • (4) Subsection (1) of this section shall not apply in relation to the use of any money or other property if the transferee is a partner, employee or former employee of the transferor; provided that, in the case of a former employee, his employment was terminated by reason of old age, infirmity, or ill health.
    (5) Subsection (1) of this section shall not apply in relation to any such matter as is therein mentioned if the transferee, borrower or permitted user is a person or body of persons, whether incorporated or not, which is carrying on an activity in the nature of a trade otherwise than for profit, or is a members' club or registered friendly society, and the loan or permitted use is in connection with that activity or with the activities of such members' club or registered friendly society; nor shall subsection (1) of this section apply if the transferee, borrower or permitted user is a church, chapel, synagogue or mosque'.

    The Government undertook in Committee to put down an amendment on Report so that the charges under this clause—then Clause 36—would not start to run until 6th April 1976. This is an area of considerable complexity. My right hon. Friend and I have undertaken to consider quite a few matters relating to the clause. That is why we propose to postpone its coming into effect. By the time it has come into effect I hope that we shall be able to meet some of the points made in Committee. I shall be happy to answer any questions.

    11.45 p.m.

    This will have to be a very brief debate, although it is on a very important clause. In many ways it is the most iniquitous clause in the Bill, as it is an attempt to levy tax on a purely notional transfer.

    We had an undertaking in Standing Committee, as the Financial Secretary has stated. We believe that undertaking should go further at present and that there should be no charge at all until 1980, so that at least there could be a General Election before there is any question of this tax being imposed.

    Meanwhile, we want to hear from the Financial Secretary whether he will reiterate the undertakings he gave in Standing Committee that he would table particular amendments on Report—which he has been unable, it seems, to do.

    I shall refer to various columns of the Official Report of our proceedings in Standing Committee on 12th February, although it was in the small hours of 13th February when we debated this matter. As reported at column 1526, the Financial Secretary conceded that loans to partnerships and loans by one partner to another partner in a partnership would be exempt.

    I hope that the Financial Secretary will pay attention to what I am saying and not to what the Government Chief Whip is saying.

    At column 1528 the hon. Gentleman conceded that there would be exemption of "loans to companies" and that there would be an amendment on Report. At column 1544 he changed this to "loans to businesses".

    At column 1575 he said that it would be loans to partnerships and close companies. He promised again that he would table an amendment on Report. He has not done so. We want to make sure that he is going to do that and not use this delay as any excuse for getting away from the commitment he made in Standing Committee.

    Again, the Financial Secretary said in Standing Committee—and this is very important—that for the purposes of this—I should be grateful if the Financial Secretary would pay attention to me and not to the hon. Member for Durham (Mr. Hughes), interesting though he is. The Financial Secretary conceded that for the purposes of this clause relating to a notional income—because what we are talking about is a notional income—the gross difference between the nil interest which is charged normally in these cases and the notional interest which might be expected to be charged would be deemed to be part of the net income of the putative transferor. We want that undertaking restarted tonight. This is very important indeed. In particular, the Financial Secretary also said in Standing Committee that it would be treated as normal expenditure and as a normal income of the transferor—in other words, that there would be an out-of-income exemption in Schedule 6 for such transfers.

    It seems to us very strange that there is any longer any reason for the clause to be in the Bill at all, because the out-of-income exemption, coupled with the other exemptions about which the Financial Secretary gave solemn undertakings that he would table amendments on Report, means that there are virtually no cases in which this particular notional transfer would fall to attract tax. Indeed, it is very right that that is so.

    In conclusion I shall say only that a large number of close companies and private companies are financed by interest-free loans from the proprietors or the participators. The Chief Secretary knows that very well. Their premises may be rent-free premises provided by the participators and proprietors of the business. Indeed, there is also the case in the private sphere of rent-free accommodation provided to former employees.

    What the Chancellor of the Exchequer has been able to say on this clause appeared in Hansard for yesterday. He said:
    "The answer that I gave to the hon. Member for Blaby (Mr. Lawson) was on advice that I received."
    This was the Chancellor's excuse for having got it wrong, as so often he gets things wrong, on Second Reading. He continued:
    "I have read with interest the points made by the hon. Gentleman in Committee upstairs. It is true that the precise juridical meaning of the word 'use' in the clause is open to argument. For that reason, as I think the hon. and learned Member for Dover and Deal (Mr. Rees) knows, we have put down an amendment, which will be considered in the next few days, which will prevent the clause applying until April 1976. By that time we hope to have a completely satisfactory juridical formula."—[Official Report, 5th March 1975; Vol. 887, c. 1494]
    It is most unsatisfactory that at this stage, on a clause which is of the utmost importance for every private business, the Government still cannot find a juridical formula, as it is called, not merely for the case cited by me and then cited by the Chancellor but for all these cases of loans to close companies, loans to partnerships, loans to non-profit-making organisations, clubs, churches and the rest in whose case also interest-free loans fall to be caught.

    I want a solemn undertaking from the Financial Secretary that in the next Finance Bill the undertakings which he gave will be implemented in the form of amendments, including, most important of all, an amendment making clear that the notional income which is alleged to be caught will be the net income of the transferor and will therefore be exempt under the out-of-income exemption under Schedule 6.

    We have reached a stage of legislative farce which has seldom been paralleled in the history of any Parliament. The clause sets out to apply capital taxation to what are, in effect, income payments. I have suggested that the clause may well be out of order, and, though I do not wish to pursue that now, I find it a curious anomaly that a tax which is called a capital transfer tax should be deemed to apply to notional income payments, whether or not they have been received.

    In addition, the clause has been applicable since 26th March 1974, but it will not apply until 6th April 1976. Thus, we have here a clause which is out of order, which applies capital taxation to income payments, which has been on the statute book for two years, but which is not to be applicable until the end of that two-year period, by which time it will have been totally remodelled and brought forward again.

    I assume that this is the sort of legislative gobbledygook which endears itself to the Labour Party—that citizens are told for two years that they are subject to this tax, though they will not be told the details of it and the payments do not have to be made till 1976, so that transactions which might be entered into at any time over those two years will have been taxable under the clause although they are income transactions, and the Treasury in its wisdom will in due course make up its mind what it thinks the clause is supposed to mean and who is supposed to pay tax under it. This is the glorious Socialist heaven which hon. Members have been fighting and working for, and I congratulate them.

    For so long as I am able to recall the events on this Bill, I shall always remember the words of the Chief Secretary ringing out when we were in Committee on the Floor of the House—"We believe that we have here a good tax, and we are sticking to it". Does he still think that?

    My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) said that this is an absurd clause. I wish to add to what my hon. Friend the Member for Blaby (Mr. Lawson) said. He found no reason for the clause being in the Bill at all. I can find one reason and one only of any merit, and that is to provide a convenient place for the making of our Amendment No. 438.

    This is a matter of interest to many small and medium-size companies, especially those in which the executive directors and managers hold an equity stake. I hope that the Financial Secretary will at least agree with me that those companies play a valuable rôle in our economy, and are more than the average dependent upon retained earnings for their investment and therefore the continuity of the employment they provide.

    The shareholders in those companies will include a number of institutions, such as Finance for Industry, as well as retired managers and employees and widows of retired managers. Therefore, it is necessary for the companies to pay dividends. Yet it has been the practice for many years for the working directors and managers who have an equity shareholding to waive the dividends to which they would be entitled to help the retained earnings of those companies, to help their investment, to help them provide more employment and more growth in the economy.

    It may seem absurd that we have this extraordinary capital taxation on an income transaction. It seems to me even more absurd that we should have a capital tax on an income transfer which has not taken place. Therefore, I particularly commend Amendment No. 438. Under existing legislation, the Inland Revenue has powers to prevent the abuse of dividend waivers. The vast majority of companies to which this would apply are close companies. Therefore, if there is any thought that the provision is being abused there is already legislation which would allow for that to be stopped.

    If we are to allow retentions, which are essential to investment, dividend waivers must be clearly shown not to be a transfer, and therefore in no way caught by this extraordinary and unnecessary clause.

    The clause is peculiar, in that it appears to have been drafted without the dimmest understanding of the way in which close companies or partnerships work. That is not surprising, because Labour Members want to wipe most small businesses off the face of the earth by the tax. In its original form, the clause would have gone some way towards having that effect on close companies and partnerships.

    The Government are planning to postpone the whole thing until April of next year, which we believe would have been a good idea for the entire tax. We want to make sure that they are not just shuffling it forward, and going back on the undertakings in Standing Committee that in any new clause full allowance would be made for two amendments which were pressed.

    The first was that the gross interest would count against net income. We want to make sure that that is kept on board and not lost in the year during which the search for the better juridical form takes place—the absurd search for the Snark of a clause which appears to be very elusive. When the clause was drafted and approved by the Chancellor and Treasury Ministers they did not have a clue about the effect it would have on small business, and the damage it would do. Now that they have heard our arguments, we want to be sure that some understanding has penetrated their minds and that they are sure that their undertakings will be kept. If the clause had been left as it was, that would have been the end of close company finances of a normal kind, and of partnership finances in many instances. That is why we pressed hard that these changes should be made. It is essential that we have reassurances on these two points before we pass on. We must have a clear undertaking in view of the rumblings from the Chancellor about the juridical form. I find it hard to believe that the Chancellor had any clue of what the clause was about. The junior Ministers had only a dim understanding and it was left to the Opposition in Committee to give them an explanation.

    It being Twelve o'clock, Mr. DEPUTY SPEAKER proceeded, pursuant to order [ 4th March], to interrupt the proceedings.

    Debate to be resumed upon Monday next.