Clause 22.—(CHARGE OF TAX ON SUMS APPLIED OUTSIDE U.K. IN REPAYING CERTAIN LOANS.) (Hansard, 17 June 1953)

§ Mr. E. Fletcher
I gather, Mr. Hopkin Morris, that you will not be selecting the Amendment which appears under my name in page 23, line 30, to leave out "1953–54," and add "1952–53," and on that assumption I gather that it will be open to me to deal with the point now.
It will be appreciated that the object of this Clause is to check what has become an almost notorious and glaring possibility of tax avoidance. I am glad to have the opportunity of congratulating the Chancellor on having introduced this Clause into the Bill in order to put an end to the scandal which was exposed in a recent judicial decision in another place in the case of the Commissioners of Inland Revenue v. Gordon when the House of Lords affirmed an earlier decision of the Court of Appeal in the case of Hall v. Marians.
1021 The kind of device to which people have resorted in order to avoid payment of Income Tax is this. A taxpayer may be in receipt of income abroad. In the case of Hall v. Marians it was receipt of income from Ceylon; the income in that case was paid into a banking account in Ceylon, and after a short interval the taxpayer used that income in order to purchase some India Bonds which were held by his bank in Ceylon. He then proceeded to incur an overdraft at the London office of the same bank.
Not wishing to pay off his overdraft at his London bank out of his United Kingdom income, he instructed the Ceylon branch of his bank to sell the India Bonds and apply the proceeds in discharging the overdraft. This, of course, was done by entries in the books at the bank, and the result was that the taxpayer had used his income arising overseas in order to discharge an overdraft which he had incurred at the London branch of the bank.
The House of Lords held that that transaction did not amount to a remittance by the taxpayer of the owed income to this country, and, therefore, was not taxable. As soon as that decision had been affirmed in the House of Lords it became obvious that any taxpayer who was so minded and who enjoyed income arising abroad could leave it there and would incur no liability to pay any Income Tax on it, and at the same time would in effect get the full benefit of 'bringing it to this country, by going through the simple operation of going to his London bank, borrowing money which was spendable as capital and then instructing the overseas branch of the same bank to pay off the overdraft incurred in London.
That device is one to which no reputable taxpayer would resort. Nevertheless, I think we should all agree that it is very desirable that by this Clause the Government should effectively take steps to put an end to this particular loophole in the Income Tax provisions.
My only criticism of the Clause as it stands is that it does not, to my mind, go quite far enough, and that is why I put down the Amendment which was designed to change "1953–54," in the last line, to the current year 1952–53.
As the Clause stands, it will still be open to a taxpayer to use the machinery 1022 of this case for the current year, to use income arising abroad during the current financial year, for the purpose of repaying a debt incurred by him to his London bank prior to 15th April of this year. I might have hoped that the Clause could have been still further tightened and that the loophole in our legislation, having been exposed, would be effectively closed as rapidly as possible. There is no reason why, as from 14th April, the date of the Chancellor's Budget statement, this device should not be completely checked. Why should a taxpayer be able, for the whole of the current year, to use income arising abroad for paying off a debt incurred here under this device, and thereby avoid liability to United Kingdom Income Tax upon it?
I imagine that the only possible justification that will be given by the Solicitor-General for not making the Clause operrate retrospectively is the repugnance that we all feel to anything in the nature of retrospective legislation. It is carrying that repugnance to unnecessary lengths to allow this device to operate for the full period of the current year of assessment. Taxpayers who are minded to resort to this method of avoiding tax would be justified in assuming that something would be said about it in the Chancellor's Budget statement, as it was. I should not have thought that hardship would have been suffered if, from 15th April this year, the loophole had been effectively closed. As, however, my Amendment has not been called, I hope that the Solicitor-General will look at this matter before the Report stage to see whether the Government themselves are prepared to tighten up the Clause in the way I have suggested.

§ The Solicitor-General
I hope to be able to satisfy the hon. Member for Islington, East (Mr. E. Fletcher) that there is no need to tighten up the Clause in the way he has suggested. In the course of his comments on the Clause he has referred to the case of Hall v. Marians. The decision in that case revealed a loophole, but not of a very large extent, because only a limited class of people could conceivably make use of it, and it does not appear from the reports that there was any tax avoidance motive in using it. Apparently, partly because of the war and partly because of the complexity and difficulty of dealing with these loopholes, 1023 this one has not been dealt with until now. The reason for dealing with it now is the recent decision in the House of Lords which has drawn attention to it.
I am glad that the hon. Gentleman welcomes our endeavour to stop up this loophole. I think it is satisfactorily stopped by the proposals in the Clause. The hon. Gentleman will appreciate that the manner in which we are seeking to prevent this avoidance in the future is by treating money used in repayment of the loan as an amount liable to tax. Applying that method, it becomes important to try to determine the line marking where this Clause is to operate and what transactions should be left out. We have borne in mind that this loophole has existed for a great many years. One might almost say that its existence has been acquiesced in up to now. There may be people who think they were perfectly entitled, nothing having been done about it, to follow the methods revealed by that case. Many people who have been taking advantage of that loophole may be of small means.
It seemed right to us, having regard to the history of this case, to seek to avoid any element of retrospection, and we have therefore drawn subsection (5), to which the hon. Gentleman has called attention. We did not feel that it was right suddenly, after this lapse of time, to say that one would have to pay tax now upon an amount used to repay a loan, made long before the Budget, when one may not have made any provision for that tax. What we have done is to secure that those who borrowed the money before Budget day will have a year in which to pay it back, without the sum which is used for payment back being liable to Income Tax. That is a sound proposal and a right one, which avoids a retrospective effect.
It might be argued that we ought to exempt from taxation any sum, whenever it is paid back, in relation to a loan made before the day of the Budget. I think it is right to provide that there should be one year in which people can repay loans which have already been obtained without incurring liability to tax which they could not have foreseen at the time they made the loans. I hope that my explanation will satisfy the hon. Gentleman.

§ Mr. Mitchison
While I appreciate the value of this Clause as a whole, I think there is a good deal more to be said about it than the Solicitor-General has realised. The question seems to be in regard to a series of transactions which have begun and have not yet been completed. They are transactions which, on the Solicitor-General's view of the matter, are to take advantage of a recognised loophole. I say "recognised" because, as the right hon. and learned Gentleman rightly pointed out, the law has stood in this form for some time past. We now see a good and sufficient reason, I am sure with the approval of the Committee, for stopping up that loophole.
6.0 p.m.
The point upon which I personally am not satisfied is that I should have thought no hardship would have been caused if the part of the transactions which has been already effected could be retracted, that is to say if the taxpayer in question could put himself back. I should have thought that that was possible in a case of this sort, and, if it was possible, then the allowance of a year or thereabouts to complete what is, on grounds of policy, an undesirable transaction, was a mistake. To close the loophole in a series of transactions which can have begun and which, so far as they have gone, can be put back would not be retrospective legislation, would not inflict any hardship and would, on balance, be right.
I am not asking the Committee to divide against this Clause on that ground, but I am asking the Solicitor-General to reconsider the question whether it would not be better in the circumstances to provide for cases, if they need a special provision, where the taxpayer concerned can put himself back in the position in which he would have been if he had not started on this series of arrangements. When we are dealing with comparatively short periods like this, I do not think that it is really any argument to say that provision may not have been made for taxation. I fully appreciate the force of what the Solicitor-General said about the state of the law now and some time previously. Nevertheless, in a transaction of this character one ought to give effect to the question of whether special provision had or had not been made
1025 The real point is whether people, by means which have been lawful and we have allowed to become unlawful, shall be allowed to avoid taxation. Whilst one does not want to turn the Treasury or the Government into instruments of oppression, it does not escape my notice, nor I am sure the notice of the Committee, that we have been granting concessions of various sorts on good and sufficient ground on a number of Clauses. This is the first loophole. Let us stop it up properly for the rabbit that is outside —if rabbits do sit outside loopholes— and also for the rabbit or other animal that has gone halfway through.

§ The Solicitor-General
I do not think that any alteration such as the hon. and learned Member for Northampton (Mr. Mitchison) suggests is necessary or desirable. Under the Clause the individual concerned may have borrowed the money and spent it before the announcement of the Budget. He has then the liability of repaying the loan overseas if he is one of those within the Hall v. Marians rule. Bearing in mind that the tax now is to be imposed not on the amount borrowed by the taxpayer but on the sum that he uses to repay, we feel it right that in relation to the sums borrowed by the individual before the Budget date, which presumably he has spent and which he has to repay, there should be a year to repay without incurring liability to tax. Under the Clause, if anyone within the Hall v. Marians rule borrows money he will not be able to avoid liability for tax on the repayment. I think that that is a fair compromise, and I commend it to the Committee.

§ Mr. Mitchison
The whole of that argument depends upon the possibility of his having spent the money. With great respect to the Solicitor-General, in all the circumstances that seems to me to be a rather poor argument.