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Clause 39

Volume 888: debated on Monday 10 March 1975

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Free Loans, Etc

Which amendment was : In page 30, line 35, at the end, to insert the words :

but no period beginning before 6th April 1976 shall be a chargeable period.'—[Dr. Gilbert.]

Question again proposed That the Amendent be made.

4.4 p.m.

The House, or at least some Members, may recall that when we were rather abruptly interrupted at midnight on Thursday we were dealing with Clause 39, the free loans clause. It is a curious piece of drafting, and it has come to be known by hon. Members who have been following these things through as the lost clause in the Bill because, first, the Chief Secretary and the Financial Secretary had some difficulty in interpreting it when it came forward for discussion, and then the Opposition amended it in Committee to the point where in effect it was completely sterilised and removed from effective existence. The Chancellor of the Exchequer then postponed its operation until April of next year and when last seen was forlornly looking for a juridical formula to make the underlying aim of the clause effective again.

Our interest, besides our general interest of wishing never to see such an absurd provision in any Act on the statute book, is to deal with the undertakings given in Standing Committee by the Financial Secretary that if ever such a provision appeared on the statute book certain aspects would be protected from its more lethal effects.

There was the undertaking given in response to an amendment that gross in terest indicated in the clause—that is, the notional interest flowing supposedly and deemed to flow from loans given at no interest or low interest—would be added to the net income of the donor, from which certain consequences follow—for example, whether that income could possibly be liable in any form to capital transfer tax, but that is for the Government to sort out.

Secondly, there was the undertaking that any loans given as part of a partnership, partnership operations or in the financing of close companies where this is customary, as I think Treasury Ministers have learned—although the drafters of the clause did not know beforehand—as part of the whole financing operation of close companies, would be protected, and will be so when a clause comes forward in April 1976 presumably in the Finance Bill of that month and when the Chancellor produces this juridical formula for which he is so desperately searching.

Those are the two undertakings and we should like them on the record so that we may be satisfied that there is no suggestion that this postponement will be long enough for people to forget about these little local difficulties and for the Government to bring back this nonsensical clause unamended, which would be very damaging.

The hon. Member for Guildford (Mr. Howell) has put his finger on a couple of points about which he wants reassurance, and the hon. Member for Blaby (Mr. Lawson) raised many more on Thursday evening, largely in repetition of our Standing Committee proceedings. I shall, of course, during the coming year examine all the points that I undertook in Committee to examine and I am sure that both hon. Gentlemen will accept that the Government have no intention of using the period of recollection in tranquility for resiling from any of the commitments given earlier in our proceedings on the Bill.

I am sure the hon. Gentleman does not want to make it appear to the House that the commitment was merely to examine. In a number of cases the commitment was to table amendments on Report to meet the points that had been made.

The hon. Gentleman is right. The commitment varied according to the context of what we were debating, and I take the hon. Gentleman's point completely. We have met the whole range of difficulties by this Government amendment which ensures that the clause shall not come into effect until April of next year, and I am sure the hon. Gentleman will welcome that.

I could go further now if the hon. Gentleman would like me to do so. On the particular question of loans to close companies and partnerships, I am happy to repeat the categorical undertaking that I gave in Committee that the revised legislation will incorporate an exemption in accordance with the principle of Amendment No. 917 tabled in Committee. It will cover loans to close companies and partnerships where the transferor is a participator in the company or a member of the partnership, and loans to companies will not be confined to the close company situation.

The Opposition were seeking reassurance on one other point, namely, that the gross consideration for the use of a loaned asset should be treated as part of the transferor's net income or, if less than full consideration is charged for the use of the asset, the gross difference between the normal consideration and the consideration actually charged. So that we have the record straight, I will repeat what I said in Committee :
" It is considered that subsection (1)(c) must mean without further words that the amount deemed to be transferred is capable of being treated as both normal expenditure end as income of the transferor ".—[Official Report, Standing Committee A, 12th February 1975 c. 1570.]
None the less, I will again consider whether there is any need for revision of the clause to make this intended result doubly sure. It was one of the many cases in which the Opposition insisted that it all meant something different from what we insisted it meant. On many occasions my right hon. Friend the Chief Secretary and I have been at pains to lean over backwards to try to meet Opposition objections, although we did not think that the passages were ambiguous.

Will the hon. Gentleman deal with the point made on Thursday by my hon. Friend the Member for Hove (Mr. Sainsbury) concerning dividend waivers, which is covered by Amendment No. 438?

The hon. Gentleman is being uncharacteristically impatient. I intend to refer to all the items raised in our debate on Thursday.

Amendment No. 91 would deny the application of Clause 39 to the provision of dwelling houses. It goes further than Committee Amendment No. 451 in the name of the hon. Member for Blaby (Mr. Lawson). That amendment excluded only houses for dependent relatives. Government New Clause 7 exempts transfers of value for the maintenance of dependent relatives, and that exemption is available in respect of any charges under Clause 39. Therefore, there is no need for any special provisions on the lines of this amendment to benefit dependent relatives.

I referred last week to the problem of houses for employees and former employees. I intend to revert to that matter, and I shall be looking at it again during consideration of possible amendments to Clause 39.

Amendment No. 92( a) would defer the operation of Clause 39 until after 6th April 1980. It will come as no surprise to Opposition Members to learn that we regard deferment until April 1976 as going as far as we can justify. I could not recommend my hon. Friends to accept Amendment No. 92( a).

Amendments Nos. 415 and 419, broadly speaking, deny the application of Clause 39 to loans to businesses, whether or not incorporated, by persons who carry on the business or are shareholders, to business partners and to non-profit-making bodies, members of clubs and churches. I have already given an undertaking to revert to the substance of those amendments at a later stage.

Amendments Nos. 416, 418, 445 and 499—of which the only one you called, Mr. Speaker, was Amendment No. 416—all bear on the same point and provide alternative wordings. Clause 39(1)( c) provides that :

" the transfer shall be treated as made out of the transferor's income."

The amendments would embellish those words, which we consider to be sufficient in themselves. We undertook, in column 1571, to consider the point again in Committee. I remain of the view that the

words in subsection (1)( c) mean without further addition that the amount deemed to be transferred is capable of being treated as both capital expenditure and as income of the transferor. For that reason, Amendment No. 416 is not necessary.

The hon. Member for Blaby asked about Amendment No. 438, to which the hon. Member for Hove (Mr. Sainsbury) spoke on Thursday. The amendment is self-explanatory, but it is not in place attached to Clause 39. If he will look at the earlier clauses, particularly Clause 20, he will see that that is the appropriate clause to which to attach the amendment. A dividend waiver cannot be concerned with the use of money or other property without consideration. As we have gone past Clause 20, it might be convenient for me to say to the hon. Gentleman that at first sight a waiver would be caught by Clause 20(7), but there is a let-out in certain circumstances under Clause 20(4), and the chargeability or otherwise of a dividend waiver would depend on the facts of the case as covered by those two subsections.

4.15 p.m.

I should like to get absolutely clear this matter of great practical significance. Suppose a person who feels that he does not need a dividend from a company in which he has a substantial interest decides to execute a waiver under paragraph (c) and no consideration moves the company. He would be conferring a gratuitous benefit on the company because its funds would not be depleted by the amount of the dividend which would be payable to him. Would that person be treated as having made a transfer to the company?

The answer depends upon the facts of the case. In general the intention would be that the transfer should not be chargeable, but there could be circumstances in which the waiver of a substantial dividend accrued to an individual member of the family in a close company situation. The circumstances would determine whether the waiver were chargeable.

I appreciate how difficult it is to probe these delicate matters across the Floor of the House, but I am a little disturbed about the Financial Secretary's answer. He referred to a substantial shareholder—I cannot see why it should matter whether a shareholder is substantial—and seemed to suggest that there might be a transfer not to the company but to the other shareholders who took their dividends. That alarms me a little. Would the Financial Secretary be kind enough to elaborate on that?

This is very much a Committee point, but I will do my best to assist the hon. and learned Gentleman. The essence of the matter is that if the effect of the waiver were to create a considerable benefit for another shareholder, which could happen in a close company situation where there are few shareholders, a chargeable transfer could be deemed to have taken place. I cannot go into the matter in greater detail because it depends on the facts of the case, as I am sure the hon. and learned Gentleman appreciates.

Is the hon. Gentleman referring to a benefit to the shareholder or to the company?

I was referring to a benefit to a shareholder. Where a close company is virtually owned by three or four people, if one shareholder waived a dividend the major part of the benefit would fall to another shareholder, as distinct from the situation which obtains in a public company with many shareholders. This would depend on the circumstances on each case.

Surely that would not be a transfer of capital but a transfer of income. The shareholders who benefited would have a larger income and would therefore be liable to larger income tax. How can the Government claim that the transaction which my hon. and learned Friend has described is a transfer of capital? It is surely a transfer of income. That is why I maintain that this clause should not be in the Bill. It is a clause which taxes income.

The hon. Gentleman is flogging a horse that has been flogged quite a bit. He has already raised this point about whether the clause should be in the Bill and whether it is in order. He has done so many times and it has been found to be in order many times. I do not think it is profitable for me to follow that point yet again. The question is whether there is an intention to convey a gratuitous benefit. If there were such an intention by the exercise of a waiver, there would be a liability to capital transfer tax. It all depends on the facts of any individual case and whether the intention to create a gratuitous transfer was paramount.

In view of the difficulty we are having on this point I wonder whether the Financial Secretary would agree to look at it again and see whether he can find some form of words which would make the situation clearer to shareholders, companies and their financial advisers.

Whenever I say that I will look at something again I am castigated by the Opposition for not understanding the Bill. I understand the Bill very well. I am prepared to look again at the matter. The relevant part of the Bill to which this amendment should attach is Clause 20. I do not think we can advance consideration of the point later. If the hon. Gentleman would like to write to me about any set of circumstances he has in mind I would be happy to look at it.

I promise not to castigate the hon. Gentleman again but may I ask him whether, in the examination which will take place before this is brought forward in April 1976—with the juridical formula—there could be new definitions or explanations underpinning the clause, explaining to the lay and expert public how it is that if Clause 1(c) says that the transfer should be treated as made out of income from the transferor and Schedule 6 says that if it is made out of income it is exempt, chargeable transfers can arise under the clause? This is bound to puzzle anyone who tries to following our proceedings outside.

As I have said in Committee, the Inland Revenue produces a massive and comprehensive set of explanatory notes to the Bill. It intends to produce a revised set of notes to take account of the amendments made in Committee. I am sure that it would be possible to cover the point made by the hon. Gentleman. I think that is all I need to say at this stage except to commend Amendment No. 92.

Amendment agreed to.