§ Mr. Diamond
I beg to move Amendment No. 179, Clause 48, in page 110, line 16, to leave out "(a)" and to insert "(c)".
I do not know whether it would be convenient for you, Mr. Speaker, and for the House, if we discussed at the same time Government Amendments Nos. 180, Clause 48, in page 110, line 19, 91 and 181 in Clause 48, in line 21, at end insert:Provided that for purposes of paragraph (b) above the company shall be treated as carrying on any trade carried on by a subsidiary of it (both being bodies corporate), if the subsidiary also is resident in the United Kingdom; and for this purpose "subsidiary", subject to subsection (5A) below, has the meaning assigned to it for certain purposes of the profits tax by section 42 of the Finance Act 1938.(5A) In determining for the purpose of subsection (5)(b) above whether one company is a subsidiary of another that other company shall be treated as not being the owner—
- (a) of any share capital which it owns directly in a body corporate if a profit on a sale of the shares would be treated as a trading receipt of its trade; or
- (b) of any share capital which it owns indirectly, and which is owned directly by a body corporate for which a profit on the sale of the shares would be a trading receipt; or
- (c) of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom.
§ Mr. Speaker
If the House so pleases, but I would say that if we include Amendment No. 181 in our discussion, I would propose that we discuss with it the Amendment standing in the name of the hon. Member for Yeovil (Mr. Peyton) and other hon. Members as an Amendment to the proposed Amendment, Clause 48, in line 5, at end insert:Provided also that for the purposes of paragraph (b) above the company shall be treated as carrying on a trade where its business consists mainly in the making of investments and the principal part of whose income is derived therefrom and the activities of such a company shall be deemed to be carried on outside the United Kingdom to the extent that its investments are in companies whose activities are carried on outside the United Kingdom.
§ Mr. Diamond
Thank you, Mr. Speaker.
These three Amendments, then, fulfil an undertaking given in Committee by myself to the right hon. and learned Member for Warwick and Leamington (Sir J. Hobson) on 3rd June. In reply, I said that I could not accept the Amendment we were then discussing because it did not go far enough, but I undertook to introduce on Report an Amendment which would, I hoped, fit the circumstances described by the right hon. and learned Gentleman and, perhaps, go a little wider.
There is a special provision in the law, dating from 1949 and now found in Sec- 92 tion 138 of the Income Tax Act, 1952, which gives relief to a trading company resident in the United Kingdom, subject to fairly tightly-drawn conditions including, in particular, the provision that the payment of the interest is secured mainly upon assets outside the United Kingdom which are employed in the trade and belong to the person by whom the trade is carried on.
There have been many occasions when it has been represented that that condition is unduly restrictive, and the right hon. and learned Gentleman was, if I may say so, quite right in observing that many large companies raise loan capital by means of a public issue abroad, sometimes on the Continent of Europe; and that. for the most part, such money is raised on an unsecured basis as opposed to the condition of security which at present exists. I think that he pointed out that the Government ought not to appear to insist on United Kingdom operators giving security abroad if the lenders themselves did not ask for it. We accept the validity of this argument, and have therefore tabled these three Amendments.
As to going a little wider, as on the earlier occasion I indicated that I would wish to do, it is the case that we have examples where it is desired to raise money for the purpose of a trade carried on by a subsidiary company in a group of companies and it is convenient for the money to be raised by the parent company rather than by the subsidiary itself. The parent company may not itself be carrying on a trade, but lenders may nevertheless prefer to rely on the credit of the parent company rather than on that of the subsidiary company.
Accordingly, we have decided that the relief given by Section 138 should also be made available to a parent company resident in the United Kingdom whether or not it is carrying on a trade in respect of the liability for interest on money which it raises abroad for the purposes of the overseas trade of its subsidiary company resident in the United Kingdom.
Extension of this relief to parent companies is, however, limited deliberately to the case where the subsidiary company which is carrying on trade abroad is resident in the United Kingdom, and this is where I now deal with the other point that is being discussed.
93 Where a subsidiary company is resident abroad, relief would already be secured under other provisions. The parent company would no doubt receive income from its non-resident subsidiary, which would be foreign income and it would therefore be able to set against that foreign income amounts due by virtue of Clause 48(5,c) for interest the parent company paid on the foreign loan. We do not therefore have to deal with that situation, but only the situation where the subsidiary company is resident. I hope that we have met fully the desire of the right hon. and learned Member for Warwick and Leamington and have gone a little further, although perhaps not quite so far as we are now being asked to go.
§ 6.30 p.m.
§ Sir J. Hobson
I express my gratitude to the Government, and to the Chief Secretary in particular, for having met this point. It is an important one. It affects many large companies which raise loan capital overseas and in respect of which it would have been grossly unfair if they had not been able to deduct that loan interest from their trading profits and the total amount of which Corporation Tax was to be charged. I express gratitude for the way in which this has been dealt with, subject to the Amendment to be moved by my hon. Friend the Member for Yeovil (Mr. Peyton), who feels that in some details the proposal made by the Government can be improved.
§ Mr. Peyton
On the last point made by my right hon. and learned Friend the Member for Warwick and Leamington (Sir J. Hobson) I have no doubt. My doubts occur as to whether the Chief Secretary will allow sense to lead him along the proper path or whether once again he is to consult those dreadful factors, Treasury convenience or Inland Revenue convenience, which will not influence me.
The right hon. Gentleman would be helpful to the extent of correcting me if I am wrong, but so far as I understand, a company has to face two objectionable limitations before it can get the benefit of the Clause as amended by the Chancellor's Amendment. Those restrictions are, first, the requirement that borrowings must be related to particular trades and, secondly, that either the borrower or a 94 subsidiary must be a United Kingdom resident. On the first objection, I ask the right hon. Gentleman to consider that where there is an immense complex group of companies and finance is raised in myriad forms all over the world for a multiplicity of purposes, it is very often, if not always, impossible to marry a particular borrowing with a particular project. This limitation would put a certain measure of serious hardship, although they are rare, on very important large groups of companies.
The second limitation is that the borrower or subsidiary company must be a United Kingdom resident. Very often in these concerns a subsidiary company will be incorporated locally because there is no alternative open to it. In order to comply with local requirements in the territory concerned the company has to be registered there. On the third condition, that the operation must be carried on outside the United Kingdom, for my purposes there is no objection, but on these other two points the Government, probably unintentionally and unwillingly, are imposing a quite uncalled for limitation on certain companies.
I give an example. I am sure that the right hon. Gentleman will not react to my doing this in a way which has become disagreeably common lately. One of the major oil companies of this country, British Petroleum, I am advised, will be unable to obtain any relief from the interest paid on its recent German loan. Without this or an Amendment achieving a similar purpose, no effective relief would be obtainable from finance similarly raised. Maybe rightly, I do not challenge that for a moment, the Government say to large companies trading overseas that when they have very considerable demands for new capital they must do their utmost to raise some of that money overseas. It is unreasonable and unjust, when that duty has been put upon them, to inflict on them a tax penalty as a consequence of their so doing. I am sure the right hon. Gentleman would be the first to agree that that would be wrong. This Amendment to the Chancellor's Amendment will, I feel sure, commend itself to the right hon. Gentleman because without it a quite unintended injustice and wrong would be done.
§ Mr. John Harvey
I sought earlier in the debate to support my hon. Friend the Member for Yeovil (Mr. Peyton) on Amendment No. 104. The Chief Secretary then argued, as perhaps he will be inclined to argue again, that he had to differentiate between trading and investment. The point we are seeking to make is that in large consortia one cannot differentiate between the two; they are all part and parcel of the business of trading. Legislation as it stands, if the Chief Secretary persists in his attitude, will involve two differentials and produce all sorts of complications for some of our largest companies. I hope that the Chief Secretary will see that he would be benefiting our trading capacity if he met some of these difficulties.
§ Mr. Diamond
I speak again by leave of the House. The hon. Member for Yeovil (Mr. Peyton) has drawn attention to two main arguments, one relating to residence and the other to trading purposes. May I make it clear once more than I do not think that there is any need to make special provision for nonresident subsidiaries, because they are already fully catered for.
If I may explain it a little more fully, where a parent company resident here is the borrower, it will presumably, if it borrows the money, relend it to the subsidiary and the subsidiary will pay interest to the parent. On that assumption, the parent will in any case get relief against the interest received from the subsidiary for the interest it paid to the original lender under Clause 48, subsection (5,c) which reproduces Section 132 (1,c) of the Income Tax Act, 1952. So that point is covered, and we have made special provision for the resident subsidiary.
Then the hon. Gentleman the Member for Yeovil gave us the example of B.P. and its German borrowing, and said that it would not be able to get any benefit, because it would not be able to set off interest on what it incurred in that borrowing. The hon. Gentleman will be glad to know that is not a correct interpretation, and that they will be able to obtain the relief which both the hon. Gentleman and the Government intend they should. If the hon. Gentleman is satisfied that the Bill already provides for that kind of case, perhaps he will not press his Amendment.
§ Mr. Peyton
I am obliged for what the hon. Gentleman is saying. I would only advance one further point, which is that I am not the only one who has misunderstood the position, and I am very glad to have put right the misunderstanding for which I am responsible on the Notice Paper, and to have it put right on the record by the right hon. Gentleman in such unequivocal terms is most welcome. I am very grateful to him.
§ Mr. Diamond
I am glad that I have been able to satisfy the hon. Gentleman. I recognise that he is by no means the only hon. Gentleman who thought what he thought was the case. It follows that if what I have said is not the position it would be for the Government to make it right at an early date. I have given what I understand to be a clear interpretation of it, and I hope, in those circumstances, that I have satisfied the House.
§ Amendment agreed to.
Further Amendments made: Clause 48, in page 110, line 19, after "tax)", insert:
and the liability to pay the interest was incurred wholly or mainly for the purposes of activities of that trade carried on outside the United Kingdom".
Clause 48, in page 110, line 21, at end insert:
Provided that for purposes of paragraph (b) above the company shall be treated as carrying on any trade carried on by a subsidiary of it (both being bodies corporate), if the subsidiary also is resident in the United Kingdom; and for this purpose "subsidiary", subject to subsection (5A) below, has the meaning assigned to it for certain purposes of the profits tax by section 42 of the Finance Act 1938.
(5A) In determining for the purpose of subsection (5)(b) above whether one company is a subsidiary of another that other company shall be treated as not being the owner—
§ Mr. Speaker
May I take it that the hon. Gentleman the Member for Yeovil (Mr. Peyton) does not wish to move his Amendment to the Government Amendment?