HC Deb 04 June 1964 vol 695 cc1345-52
The Solicitor-General

I beg to move Amendment No. 55, in page 16, line 29, to leave out from "allowable" to the end of line 35, and to insert: and one or more subsequent payments are made by the same person under the same lease, that part of the first-mentioned payment may be carried forward and treated for the purposes of computing the profits or gains or losses of the trade for the purposes of income tax as if it were made at the time when the next of those subsequent payments was made, and so made for the period for which that subsequent payment was made. It might be for the convenience of the Committee, Mr. Blackburn, if with this Amendment we discussed Amendment No. 56 and Amendments Nos. 65 and 66, which affect Clause 18.

The Temporary Chairman (Mr. F. Blackburn)

If that is the wish of the Committee.

The Solicitor-General

I am much obliged.

This group of Amendments affects what is called the carry-forward of deductions and allowances from one year to another. Clause 17 deals with the case in which the trader owns an asset—plant or machinery—leases it to the other person, who leases it back with the same kind of arrangement of a bunched-up rent. The Clause provides that there shall be allowances only in respect of a commercial rent, not of a bunched-up rent, and commercial rent as defined.

That is the purpose of Clause 17 but, on close examination, there appeared to be a loophole, and it also appeared that some drafting required clarification. Amendments Nos. 55 and 56 are designed to deal with that. As drafted, the Clause permitted carry-forward to a successor in the trade of a person who made excessive rent payments.

Perhaps I may again return to Messrs. A, B and C. If trader A owned plant and leased it to B at a premium of £8,000, and B leased it back to trader A for £3,000 per annum for three years and thereafter at a peppercorn rent or minimal rent, at the end of three years A would have paid £9,000 in rent and his tax reliefs would be limited to, say, £3,000, assuming that a commercial rent was £1,000. Thereafter, the amount available for carry-forward would be £9,000 less £3,000—£6,000. If A carried on leasing at the peppercorn rent he would be allowed the carry-forward at £1,000 per annum and, at the end of 6 years, he would get full relief, but he would have to go on for six years to get that full relief.

But if he sold—enter Mr. C—to C, and C paid to A what was, in effect, a tax-free premium which reflected both the true value of the lease and the tax reliefs that were to be carried forward, it would cause him to pay an inflated price. The purpose of these Amendments is to negative that advantage. The Amendment provides that the carry-forward is disallowed in respect of rental payments to be added to later payments except by the same person under the same lease. If it is the same person and the same lease, the carry-forward is allowed.

Amendments 65 and 66 carry out the same principle where it applies to rent, and close a similar loophole. This seemed to be a proper way of closing that particular loophole, in which it seemed that it could be possible that this disposal of the asset while the peppercorn rent was continuing would produce for that particular person a capital sum that would be inflated and would have avoided any charges upon it. I therefore move the Amendment, which would have the effect of remedying that situation.

Mr. Callaghan

I congratulate the Solicitor-General on the lucidity and charm with which, as always, he has put his case. He has led us through the involved labyrinth of Messrs. A, B and C and I notice that the Amendment has been put down since the Bill was drafted as a result of the skilful diligence of the Inland Revenue. I congratulate that Department, but so far in the development of this dramatic serial we have not had the appearance of Mr. D. I think that quite soon, the Inland Revenue having closed this loophole, Mr. D. will come along and upset all the skilful plans that have been laid. The Solicitor-General is properly detaining the Committee on these intricate matters which many of us are struggling to understand. I exempt the Solicitor-General from that remark and also my hon. Friends here with me. They understand it completely.

I do not want to exceed the bounds of debate but I utter this simple thought. Instead of going through this business of closing up loophole after loophole, time after time, and then finding that Mr. D comes along and upsets them, and once he has done that and we have blocked him Mr. E appears—and I am not sure what happens by the time we reach the end of the alphabet—would it not be simpler, if the Solicitor-General has this responsibility in 15 years' time, if we have not done it in the meantime, to have a straight capital gains tax to obviate this intricate legislation which in the end does not achieve a solution?

The Solicitor-General

The hon. Gentleman has left us with a simple thought, as he puts it, but these are not simple matters however one cares to express them. If we have a capital gains tax at the same rate as the Income Tax and the Surtax we may achieve that object. I must hope that the hon. Member never has a chance of touching the revenues of this country at all, but even if he ever had that opportunity it would still not be a simple matter. It is no use trying to pretend that any of these matters will ever be capable of simple explanation, let alone of simple practice.

Mr. Callaghan

I do not promise that it will be a simple matter. I merely say that it will be effective. At the moment it is neither.

Amendment agreed to.

Further Amendment made: In page 16, line 45, leave out from "made" to end of line 46 and insert: at a time subsequent to that at which they were made, and to the extent that a part of a payment carried forward under subsection (3) of this section is not allowable as a deduction it may again be carried forward under the said subsection (3)."—[The Solicitor-General.]

Question proposed, That the Clause, as amended, stand part of the Bill.

Sir H. d'Avigdor-Goldsmid

We have heard a great deal about what the Clause is concerned with, which is catching certain transactions and blocking loopholes, but there is some danger that a legitimate trade will also be caught in one of these blocked loopholes. When my right hon. Friend the Chancellor of the Exchequer introduced his Budget he said with reference to these provisions: They will be designed to stop a profit being made out of tax by avoidance schemes, but will not penalise normal leasing arrangements."—[OFFICIAL REPORT, 14th April, 1964; Vol. 693, c. 244.] Unfortunately, normal leasing arrangements as now known have little to do with relations between lessor and lessee as most of us think of them.

I am reminded in talking of this of Greek law where I understand it is common for a landowner to own the land, a second owner to own the tree and a third owner to own the olives that grow on the tree. This is the sort of situation that arises under what we like to call leasing. It is common to have a company, for example, manufacturing internal telephones having associated with it another company which buys the product of the manufacturing company and then leases it. But it does not lease it to the user. It leases it to a third company which will be a rental company and which, in turn, will rent the internal telephone service to the ultimate consumer.

Mr. Callaghan

This is Mr. D.

Sir H. d'Avigdor-Goldsmid

Yes, indeed, this is Mr. D. This sort of thing goes on quite normally in the world into which we are now venturing.

I am advised that there is a danger of transactions of that sort carried on by associated companies being caught by Clause 17, and it was suggested to me that the particular mischief might be avoided if at the beginning of Clause 17(1,b) after the word "asset" there were inserted the words "not being stock-in-trade of the vendor" to differentiate between the capital goods which we have all been talking about, and to which Messrs. A, B and C have directed their attention, and the end product, the telephone or the lorry or whatever it may be, which might be caught in the mischief of this Clause.

8.15 p.m.

What is the mischief of the Clause? Allowances for tax purposes are limited by the Clause to commercial rentals as defined in subsection (6) which describes commercial rent as the rent which might at the relevant time be expected to be paid under a lease of the assets for the remainder of the anticipated normal working life of the assets, being a rent payable at uniform intervals and at a uniform rate which would afford a reasonable return for its market value at the relevant time… When one turns to the definitions one finds that "anticipated normal working life" has, for any asset, the meaning given for machinery and plant by Section 281(6) of the Income Tax Act, 1952.

Further consultation of the Income Tax Act, 1952, does not produce any sort of answer to what is an anticipated normal working life. In a happy form of drafting and circumlocution the Section says: …'the anticipated normal working life' means, in relation to machinery or plant of any class, the period which might be expected, when machinery or plant of that class is first put into use, to be going to elapse before it is finally put out of use as being unfit for further use, it being assumed that it is going to be used in the normal manner and for the normal extent and is going to be so used throughout that period.

Mr. Callaghan

Very clear.

Sir H. d'Avigdor-Goldsmid

Very clear. One could not more happily expand four words into 200 words without thereby clarifying them than in this Section of the Income Tax Act, 1952. This is the problem to which we have to address ourselves. I understand that for most purposes the Inland Revenue accept the normal working life of a motor vehicle as being 10 years from the date when it was bought new. But, of course, this is simply not applicable to the little van which rattles about carrying television sets, for instance, which probably lasts for only two or three years. The system does not allow anything for obsolescence. When one is dealing with heavy plant of one kind or another, there is quite an element of obsolescence as well as simple exhaustion, so to speak, in the machine. These are points which I, least of all, can deal with satisfactorily and with which, I think, we as a Committee cannot usefully deal, but they come from people who are engaged in these perfectly legitimate businesses in such a way as to come specifically within the exemption referred to by the Chancellor when he said that these Clauses would not penalise normal leasing arrangements.

As we have all learned, what is said on the Floor of the House is not binding on the Inland Revenue. The Inland Revenue works to the book. My right hon. and learned Friend seems to have mastered this subject in a way on which I compliment him, and, of course, he is in a far better position to examine the points which I have raised. I hope that he will consider them carefully, not wishing to catch me out because my exposition of them has not been that of a lawyer, which I am not, and will accept that they raise questions which should be looked into. I ask him to give his attention to them from the point of view of those businesses which practise normal leasing arrangements among associated companies.

Mr. McMaster

Apropos of what has just been said by my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), I am a little concerned at the use of the expression "commercial rent" in this Clause and the next one. It seems to imply that there might be a non-commercial or extra-commercial rent. Would it not be better to use the expression "ordinary rent"? Also in subsection (6) one finds the expressions "uniform intervals" and "uniform rate". I am not quite sure what these mean as a matter of interpretation, and I do not know what is meant by the word "uniform" in that context. Perhaps my right hon. and learned Friend can help me on both those points.

The Solicitor-General

I shall, if I may, deal first with the points raised by my hon. Friend the Member for Belfast, East (Mr. McMaster). The expression "commercial rent" is important. Deductions may be made only in respect of what is meant to be a commercial rent, and, as is set out in the Clause, by "commercial rent" we mean the rent which might at the relevant time be expected to be paid under a lease of the asset for the remainder of the anticipated normal working life of the asset, being a rent payable at uniform intervals and at a uniform rate which would afford a reasonable return for its market value. The use of so many words, on which my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) commented in another context, arises because the courts have to be given by this Committee and, ultimately, by the House the definitions which they have to interpret. It is right to include in the definition there the word "commercial" and use that as determining the kind of rent in mind for this purpose. As my hon. Friend appreciates, similar considerations arise in relation to land under Clause 18.

I turn now to the point made by my hon. Friend the Member for Walsall, South. I shall most certainly examine everything he has said on this Question. I repeat now that, in principle, the intention is certainly not in any way to affect the wholly unobjectionable and perfectly proper systems of leasing. My first impression from what he said is that Clause 17 would not operate in respect of plant which is stock in trade of the particular company or companies concerned. My present opinion is that the Clause does not bite where my hon. Friend fears that it does. However, I accept that that is not good enough for him or for the Committee, and I undertake to see that the matter is carefully examined. I shall ensure that the object of the Clause is carried out and that there is no side-wind by which wholly unobjectionable leasing arrangements are in any way caught.

Sir H. d'Avigdor-Goldsmid

I am much obliged for that reply. May I leave my right hon. and learned Friend with the thought that, if it is not to catch stock in trade, some form of words such as I have suggested for insertion at line 11 might be put permanently in black and white in order to give effect to the point which, no doubt very badly, I have tried to express?

Question put and agreed to.

Clause, as amended, ordered to stand part of the Bill.

Back to