§ Hire-purchase agreements
§ 8.—(1) If the lease constitutes a hire-purchase agreement, for the references in the provisos to subsections (1) and (2) of the principal section to the amount of the capital sum there shall, where that capital sum was obtained in respect of the lessee's interest in the lease constituting the hire-purchase agreement, be substituted references to the amount of the capital sum after deducting any capital expenditure which was incurred by the person obtaining the capital sum in providing the lessee's interest and which is for capital allowance purposes, still unallowed at the time when the assignment or other transaction takes place in respect of which the capital sum is obtained.
§ (2) In this paragraph "capital expenditure incurred by the person obtaining the capital sum in providing the lessee's interest" means—
- (a) so much of any payment made under the lease by the person obtaining the capital sum (or, where the capital sum was obtained by the personal representatives of a deceased person, so made by that deceased person) as is not a payment in respect of which a deduction is allowable by way of income tax relief which is one of the kinds listed in subsection (4) of the principal section, plus
- (b) where the lessee's interest was assigned to the person obtaining the capital sum, any capital payment made by that person as consideration for the assignment.
§ (3) In this paragraph the reference to the amount of capital expenditure which is, for capital allowance purposes, still unallowed at the said time shall be construed as a reference to the amount of the capital expenditure after deducting any amount which, under section 297 of the Income Tax Act 1952 (definition of "expenditure unallowed" for purposes of capital allowances for machinery and plant), would be deductible in ascertaining as at that time the amount still unallowed of expenditure incurred by the said person in providing the leased asset.
§ (4) If the amount to be deducted in pursuance of sub-paragraph (1) of this paragraph exceeds the amount of the capital sum from which it is to be deducted, no charge shall arise under subsection (1) or subsection (2) of the principal section in respect of the capital sum.
§ Disposition of part of rights under hire-purchase agreement
§ 9.—(1) If the capital sum represents the consideration for part only of the lessee's interest in the lease which constitutes a hire-purchase agreement, the amount to be deducted under paragraph 8(1) of this Schedule shall be such proportion of the capital expenditure which is still unallowed as is reasonable having regard to the degree to which the capital expenditure has contributed to the value of what is disposed of in return for the capital sum.1340
§ (2) If more than one capital sum is, or is to be regarded as, obtained by the same person in respect of the lessee's interest in the lease which constitutes a hire-purchase agreement, then, so far as in respect of one of those capital sums any deduction is made in respect of capital expenditure in pursuance of paragraph 8(1) of this Schedule, that capital expenditure shall be left out of account in applying paragraph 8 of this Schedule to any other such capital sum; and the order in which this sub-paragraph is applied shall be the order in which the capital sums are obtained.
§ Meaning of "hire-purchase agreement"
(2) In Scotland, for the foregoing definition there shall be substituted the following definition—
hire-purchase agreement" means any contract, in whatsoever terms it may be expressed, whereby goods are taken on hire by one person from another person in consideration of periodical payments to be made by the first mentioned person to the other person, with an option to the first mentioned person to become the buyer of the goods.
§ 7.45 p.m.
§ The Solicitor-General
The object of this Amendment to Clause 16 is to mitigate in certain hire purchase cases the charge imposed by this Clause to which my hon. Friend the Member for Belfast, East (Mr. McMaster) referred earlier.
It is hoped that the Amendment which I am moving in respect of this part of the Clause will mitigate the harshness which did exist as my hon. Friend implied, when he intervened.
With Hire Purchase, as the Committee appreciates, in essence the trader is paying for two things: first, for the use of an asset for a period, and, secondly, for the right to acquire, usually for a nominal sum, at the end of the period. As it was drafted, the hire purchase agreement was caught, but it was essential that the hire purchase agreement should be included in the Clause otherwise all agreements could have been dressed up as such agreements. It was therefore important to include hire purchase agreements. But there was in fact a danger that this was too harsh to genuine hire purchase agreements.
Under the ordinary law hire purchase payments are divided, first, into consideration for hire which is allowed in 1341 computing profits, and, secondly, the payment on account of the purchase which, in fact, is capital outlay and not allowed in computing profits. The trader gets, first, his annual wear and tear allowance, and secondly, the initial and investment allowances. If he assigned, before the end of the hire purchase agreement the tractor or whatever it was he was purchasing, he would retain what he had under the wear and tear allowance but the intital and investment allowances would be withdrawn and there is no balancing charge which was spoken of earlier.
The Clause as it was drafted before the proposed Amendment was based on the assumption that the full payments would be deducted but on the hire purchase the trader would not have deductions equal to total payments. That meant in respect of a Hire Purchase instalment only a percentage attracted allowances and it was important therefore to carve out the capital element of that instalment, and therefore Amendments Nos. 53 and 54 seek to restrict the charge under the Clause so that it does not operate to reduce the total tax relief, that is deductions for rent and capital allowances, below the net outlay. Amendments Nos. 53 and 54 do that.
Amendment No. 72 merely introduces the words "Part I" at the start of Schedule 7, and Amendment No. 86 sets out fully that part of Schedule 7, namely, Part II Hire-Purchase agreements. We seek to import that into Schedule 7 as a second part. It operates by cutting down in hire-purchase cases the amount of the capital sum to be taken into account in computing the charge under Clause 16.
The Amendment to Schedule 7 is the substantial Amendment. In paragraph 8(1) of that Amendment we read referencesto the amount of the capital sum after deducting any capital expenditure which was incurred by the person obtaining the capital sum in providing the lessee's interestwhich is allowed for capital allowances. "Capital expenditure" is defined in paragraphs 2 and 3. What this does is to cut down in hire-purchase cases the amount of the capital sum which is to be taken into account in computing the charge under Clause 16.
I do not pretend that this is simple or deny that it has taken a substantial 1342 Amendment to deal with the case of the genuine hire-purchase agreement. It is one of the mischiefs of such avoidance that to prepare legislation to provide against the avoidance techniques the provisions must be set out in great detail and very fully so as not to damage the genuine trader. We are seeking to prevent an avoidance by persons who are setting out to avoid.
§ Mr. Diamond
What does the hon. and learned Member mean by people who are "setting out to avoid". Is that the answer to the question which he asked me a short time ago?
§ The Solicitor-General
The argument which the hon. Member set out before may sound splendid and get a lot of support, but it is a basic encroachment on the rule of law and, although it may seem to be putting it grandly, on the responsibilities of the House and of Government. This was a case in which one interfered with a lawful agreement. The hon. Member showed how deeply he felt about such people, but it may be that in some matters the principle and the rule of law are even more important. That is the position which I adopted in our discussions on the last Amendment.
Paragraph 9(1) deals with the case where the lessee receives a capital sum as a consideration for the assignment of part only of his interest under the lease, and the deduction is to be only a reasonable proportion. Paragraph 10 defines what is a hire-purchase agreement. It is necessary to include a special provision for Scotland because the Hire-Purchase Act, 1938, does not apply to Scotland, but it has the same meaning. The effect of the first two Amendments, which are paving for the latter two Amendments, is to ameliorate a harshness which was not intended and which would have affected genuine hire-purchase agreements.
§ Mr. Mitchison
As the hon. and learned Gentleman carefully and clearly explained, these Amendments begin piano, rise to allegro and end with appassionato.
It is true that one judge said that we all had liberty to order our affairs according to the law as we found it, but another judge said the direct opposite—that we must have regard to what was morally right and wrong. If the hon. and learned 1343 Gentleman feels that the rule of law is at stake when people take steps to prevent further performance of a contract which at that moment they are declaring to be immoral and wrong, what needs amending is the law, and that is exactly what we are doing by this Clause in whatever form. But I must pursue this no further.
The Amendments seem to be a reasonable compromise between what is necessary to business and what would be an abuse of a standard form of business. On those grounds we on this side of the Committee are willing that they should be taken as swiftly as anyone wishes.
§ Mr. McMaster
I know that certain persons who are concerned with hire-purchase agreements will very much welcome the Amendments.
This matter was brought to my attention by certain members of the finance and taxation committee of the Chamber of Commerce. I welcome the work of these members of bodies such as the Chambers of Commerce and the Federation of British Industries, who go through the Bill very carefully. It is a difficult Bill, and they draw to our attention matters which we might otherwise miss. In doing my work on the Bill I have found it a great help to receive the recommendations and advice of these bodies so that these matters can be brought to the attention of the Government and put right.
§ Mr. Bence
In paragraph 10(2) we read:'hire-purchase agreement' means any contract, in whatsoever terms it may be expressed, whereby goods are taken on hire by one person from another person in consideration of periodical payments to be made by the first mentioned person to the other person, with an option to the first mentioned person to become he buyer of the goods.There is a form of hire purchase in Scotland which we call, colloquially Napierism. I dare say that the right hon. and learned Gentleman has heard a great deal about this. If he had attended the Scottish Grand Committee or the Committee on the Hire-Purchase Bill he would have heard an outcry against the practice of the Napier credit structure in Scotland. Is the form of credit adopted by Napier, which seems to be a system between money lending and credit sale rather than straight hire purchase, included in these words?
§ The Solicitor-General
Except in a general form I could not advise the Committee on Scottish law, but I will see that any comments or representations which are made are brought to the appropriate attention, and if required I will report back to the Committee. All I am advised is that because the 1938 Act does not apply to Scotland it is necessary to set out the definition. I am told that the definition set out will accurately and properly include all hire-purchase agreements in Scotland, but I will certainly look at the particular matter that the hon. Member has mentioned.
§ 8.0 p.m.
§ Sir Eric Errington (Aldershot)
This adds another weapon to what I can only describe as the hire-purchase armoury of legislation during this Session. From what my right hon. and learned Friend has said, it seems that the hire-purchase agreement situation is satisfactorily protected by these Amendments. As will be known, there is another, not dissimilar, method of providing people with the use of plant and machinery—the method known as leasing.
I presume, but I should like confirmation, that there is nothing here that will affect that quite common method of the ordinary leasing of plant and machinery. As far as I can see, what is sought is to protect the Revenue from damage through the sale, as a capital asset, of a lease. If that be the case, presumably there can be no harm and, indeed, no legislation affecting what I would describe as the ordinary leasing procedure. This is of considerable importance, because quite a considerable amount of this type of business is being done at the present time.
§ The Solicitor-General
I can reassure my hon. Friend the Member for Aldershot (Sir E. Errington) that, as I said in moving the Amendment, there is no intention, and there has been no intention, of affecting the ordinary practice of leasing on proper and commercial terms, which is wholly unobjectionable and, as he has pointed 1345 out, quite properly very common and widespread. The purpose is, in certain circumstances, to claw back deductions that have been admitted. However, my hon. Friend is right to point out the importance of this leasing in industry, and its commonness. I can assure him that it is not affected.
§ Amendment agreed to
Further Amendment made: In page 16, line 6, at end add:
but, in relation to a lease which constitutes a hire-purchase agreement as defined in Part II of Schedule 7 of this Act, this section shall have effect subject to the modifications set out in the said Part II."—[The Solicitor-General.]
§ Question proposed, That the Clause, as amended, stand part of the Bill.
§ Mr. Mitchison
I wish to make only one very small point in connection with this amended Clause and the preceding Clause which amended the usual meaning of "control". I notice that these Clauses provide, and quite properly provide, for associated persons and associates to be dealt with in certain connections; that an associate may include a person who has control, and that, for the purpose of this Clause, at any rate, the definition of "control" in the Income Tax Act is thought to be quite sufficient. I say that in case the question should arise later in connection with the previous Clause.
§ The Solicitor-General
I am much obliged to the hon. and learned Gentleman for Kettering (Mr. Mitchison), as I do not think that it would be right for me to make any comment at all at this stage.
§ Clause, as amended, ordered to stand part of the Bill