Clause 68.—(COMPANY PARTNERSHIPS.) (Hansard, 16 June 1965)

§ Mr. Patrick Jenkin (Wanstead and Woodford)
I do not want to detain the Committee long, but I should like to ask a question on this Clause and I should be grateful if the Minister without Portfolio could answer it.
The Clause concerns what are called, in the side note, company partnerships. The pattern which the Clause adopts is that the profits of the partnership are to be computed on Corporation Tax principles with one or two adjustments. The adjustments are in the provisos to subsection (1), and I would refer particularly to proviso (b), which says: no deduction or addition shall be made for charges on income or for capital allowance and charges, nor in any accounting period for losses incurred in any other period". There are three separate heads there: first, charges; secondly, capital allowances and charges; and, thirdly, losses. Perhaps we can ignore losses; my question does not concern losses. "Capital allowances and charges" is defined in subsection (7) and means capital allowances and charges which come within Clause 52.
We are, therefore, left with the first head—charges. I understand "charges" to mean such things as loan interest, annual payments of various sorts, mortgage interest, perhaps royalty payments, and other things of that sort. Once the profits of the partnership have been computed on these principles, we then have to make sure that the partners pay their share of the tax on those profits. Subsections (2) and (3) deal respectively with the company's share of the profits and with the individual share of the profits. In subsection (2) we bring back the appropriate share of these charges and capital allowances and charges, and therefore no difficulty arises.
However, subsection (3) deals with the individual share of the partnership profits for an obscure reason which I am unable to understand—no doubt this is due to my mental obtuseness at this hour—

§ Mr. Harold Lever
On a point of order. I am unable, by reason of the powerful sunlight, to see the faces of hon. 799 Members opposite. Could I have some assistance in the matter, Dr. King?

§ The Chairman
The hon. Gentleman's complaint will be looked into.

§ Mr. Jenkin
I can assure the hon. Member that he is not missing anything through not being able to see my face.
When we come to subsection (3), which deals with the individual's share of the partnership profits, we find that the adjustments made under the proviso to subsection (1) are referred to again, but, for some reason, the charges—such as mortgage interest, loan interest, and things of that sort—do not appear to be brought back again. Whereas the company, under subsection (2), is allowed its appropriate share of capital allowances and the other charges, that does not appear to apply to the individual. Has this arisen because of the haste with which the Measure was produced? In short, why is the individual not allowed to deduct his share of the charges which are charges on the partnership's income?

§ Sir Eric Fletcher
I should have thought that the reason would have been obvious to the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin), who usually approaches these problems, however complicated and abstruse, with a high degree of intelligence and precise analysis. I am sure that he will be the first to appreciate that the Clause, unlike a great many other parts of Part IV of the Bill, is not concerned with translating into the scheme of the Corporation Tax the existing provisions of the Income Tax Acts.
We are here dealing with a situation which is entirely novel and unprecedented. We are dealing for the first time with the appropriate method of taxation of a partnership of which one or more of the partners is a corporation. There cannot be many such bodies, but there are some. There are some partnerships in which one may have four or five limited companies and an individual, or partnerships in which there are four or five individuals and one limited company, the shares in which the individuals and the companies respectively participate. In such an unusual and hybrid organisation the composition I have described could vary in an infinite degree.
800 The Inland Revenue and the draftsmen have, therefore, had to apply their minds and adopt some rather special provisions for the taxation of such a concern. They have had to try to merge the provisions of Corporation Tax which are appropriate to corporate bodies with the provisions of taxation which are appropriate to individuals. It is not an easy task, because totally different principles apply.
The profits of a partnership consisting entirely of individuals are fully taxed and the amount of reliefs are limited. The amounts earned by the partnership are then added to the other income of the individuals who constitute the partnership. There is then the question which some individuals must face of perhaps both Income Tax and Surtax.
I thought that the remark about the Clause having been drafted with indecent haste was uncalled for. It has been carefully drafted and I regard it as a skilful attempt to combine what is required to give precise effect to this curious and unusual form of partnership in which some of the partners are limited companies. It is not enough to refer to subsection (1, b), because that must be read in conjunction with subsections (2) and (3).
The hon. Gentleman was right in that the theory is first to treat a partnership as if it were composed entirely of a number of corporations. One then makes an assessment on that basis. Then one must hive off from that assessment the amount of the profits referable not to the corporations, but to the individuals. That is the theory in subsection (1).
Under subsection (2), one provides that a company's share in the profit or loss in an accounting period or in anything else left on one side under the proviso to subsection (1) should be calculated according to the partner's interest during the accounting period, and the company is then charged to Corporation Tax as though it were trading alone. That, I suggest, is a fair and sensible thing to do.
Under subsection (3), one makes an appropriate arrangement—[Interruption.] I hope that I am not boring the Committee. I have been asked these abstruse questions at this hour of the morning, and it is only in deference and courtesy 801 to the hon. Gentleman that I am trying to satisfy his curiosity. If he looks at subsection (3), he will find that the tax treatment of the individuals concerned in the partnership is based on the supposition that the partnership is entirely composed of individuals, except, of course, as regards the calculations of income which, inevitably, have to spring from the Corporation Tax calculations.
I could explain all this by an example and give the hon. Gentleman a series of figures; but I think that that would he an intrusion on the good will of the Committee. I hope that the hon. Gentleman will accept from me that this is a very adroit and sensible solution to a somewhat complicated tax problem.

§ Mr. Barber
It may or may not be of any significance, but I did not understand a word that the Minister said, though I must tell the Committee that I am completely satisfied.

§ Mr. Patrick Jenkin
I hesitate to destroy any confidence entertained by my right hon. Friend the Member for Altrincham and Sale (Mr. Barber), but I confess that satisfaction has not so far crept up on me. But I shall not detain the Committee further. I shall write to the Minister on a point on which, plainly, I failed to make myself clear, since he has not answered my question, and I have no doubt that we shall be able to resolve the matter in that way.

§ Mr. William Clark
Will the Minister answer this question? He told us that, in the example of, say, four companies and one individual, one first computes as for Corporation Tax, next, one hives off for the four companies, and then, for the fifth, one does it for the partnership. Is there anywhere in the Clause a provision for a partner to have relief against his share of a partnership franked investment income in respect of his share of a partnership loss, as the difference between franked investment income and losses for Corporation Tax cannot be set off? If there is a partner's part of franked investment income, is it clear that it can be set off?

§ Sir Eric Fletcher
That is a most intriguing question. I do not want to be dogmatic about it, but my impression 802 is that the answer is in the affirmative. But, if the hon. Gentleman will allow me, I shall confirm my first impression and write to him.