HC Deb 20 June 1966 vol 730 cc145-50

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

Mrs. Thatcher

The Financial Secretary will remember that we had an extensive debate on partnership covenants last year and had a number of tries at getting the Clause right. We did not succeed and some of my hon. Friends warned the Chief Secretary that his Clause then was drawn too narrowly and would prevent the payments under certain partnership covenants from having relief for Surtax purposes. This Clause has been brought in in substitution for the provisions which applied last year. As a drafting point, I would say that we are grateful that this Clause substitutes for last year's and does not merely amend the one last year by reference. It makes it a good deal easier to consider it and will no doubt make it easier for those who later have to consult the Act.

As this is our second try at this problem, it is important that we should get it right. I recognise that a majority of the Clause gives wider relief than was given last year. What we have to consider is whether that relief is sufficiently wide even now. A number of cases have been raised with me and I think that it will be easier to illustrate the point if I describe them to the right hon. Gentleman.

One solicitor has put to me the case of two separate covenants, the first concerning a partner who retired well over 12 years ago and my correspondent dealt with the inadequate provision under that partnership agreement for a pension.

That agreement gave the retired partner only a right to certain partnership profits for two years after the end of the partnership. Two years passed and the majority of his income had gone. He had no further right by virtue of the partnership agreement. But I am sure that the Chief Secretary will agree that one cannot stand only upon legal obligations in these matters. People in this position are entitled to expect that the partners will honour their moral obligations, and naturally the partners drew up a covenant to benefit that other retired partner. Because the Clause last year was not retrospective, that covenant has continued to enjoy Surtax relief.

It is now due for renewal, and I suspect that, as the Clause stands, payment made under a covenant drawn up now would not be a payment under a liability incurred for full consideration. I suspect that that would fail because of the absence of consideration.

Mr. Harold Lever


Mrs. Thatcher

There would be no consideration given by the partner, who retired ten years ago, to the present partnership for the covenant.

I am asking that where a covenant has been in existence and has been allowed and comes up for renewal, there should be provision in the Clause to provide that payments made under that covenant shall be allowed for Surtax purposes. In most cases where people retire in modern times adequate provision is made in the partnership agreement for some sort of income for the retired partner. This was not so many years ago, and people in this position will find themselves without an income or with a very much reduced income if this Clause goes through and such covenants are not allowed for Surtax purposes. Alternatively, the partners would still grant an income to the retired partner but it would cost them a great deal more, and possibly with their own obligations they could not give the same amount.

The second point concerns the widow of another retired partner, and this covenant, too, is coming up for renewal. There was never a legal obligation in this case on the partners to provide for the widow. In fact, they did it out of a sense of moral obligation. She has been enjoying the benefit for a number of years. The covenant is due for renewal. I refer hon. Members to subsection (1) and to the phrase that covenants will be allowed only if 1 payments made under a liability incurred for full consideration". A number of legal commentators have got at this Clause and have pointed out that the phrase liability incurred for full consideration is nowhere defined. For example, if a partnership covenants with a retired partner that that partnership will make payments to the widow of the retired partner, is that a liability? The widow of the retired partner could not enforce it against the partnership. What is "full consideration"? Even if the covenant were made directly with the widow, it seems to me that there would be no consideration—not merely not full consideration but no consideration at all.

We are very much concerned that this type of provision should continue to be allowed for Surtax purposes. If this point has not so far been raised with the Chief Secretary, I hope that he will think about it and, if the Clause is defective, will undertake to bring forward Amendments on Report.

I understand that a number of dependants commute their right to the income in return for a capital sum by assigning their right under a covenant to a financial institution. As the Clause is drawn, if the dependant does this it may deprive the payer of Surtax relief even though he could not prevent the recipient from commuting his interest under the covenant. It would seem wrong that the payer should himself be deprived of a relief because of something over which he had no control.

I hope that the Chief Secretary will consider these matters because it is important that this year we should get the provision right. We should try to make it as wide as possible to help those who do not stand on legal obligations but who are honouring their moral obligations as well.

The Chief Secretary to the Treasury (Mr. John Diamond)

I have listened carefully to what the hon. Lady the Member for Finchley (Mrs. Thatcher) said and there is no need for me to explain the Clause because she and, I am sure, the rest of the Committee, fully understand it in its complete and utter simplicity. It is, as the hon. Lady rightly said, a relieving Clause to a provision which was brought in last year and which was, perhaps, too narrowly defined. The Clause was introduced last year to meet representations made at that time.

The representations made on that occasion came from a number of professional bodies and were to the effect that annual payments made by individuals, paid under bona fide business arrangements not as a matter of pure bounty, should not count; in other words, should still attract relief for Surtax purposes. The essential condition was that they should arise from business arrangements and not as a matter of pure bounty.

The two examples given by the hon. Member for Finchley would clearly fall in the latter category. It would not be for me, as a non-lawyer, to go too closely into the law on this matter, particularly in view of the hon. Lady's great knowledge of these affairs. However, the distinction is, to a layman, clear. As she pointed out, they were examples of what she called "moral obligations". We all know what a moral obligation is. It is something which one is not compelled to do but which one does out of one's good nature, sense of responsibility, good citizenship and the rest of it. However, it does not count as a transfer of income and is not allowable for Surtax purposes. It was not intended that it should be. Thus, the answer to the hon. Lady's first two questions is that she is right in assuming that they would not attract relief for Surtax purposes.

In answer to her third point it would be easy to say "No, I do not think that they should count either". I can say that they would not. Although the hon. Lady was not asking that question, she did ask me to consider the matter and to see if we might extend the Clause to take that into account. I would not like to offer sympathetic consideration, although I am prepared to offer consideration. I do not want it to be understood from my words that the Government are under an obligation of any kind whatever to introduce an Amendment on Report. I will look at the matter because it has not so far been put to us. However, it seems at first sight to be something which does not call for legislation or adjustment in the Clause, but it would be discourteous of me to give an offhand answer. Thus, I will look at it further, but I do not want it to be thought that I am undertaking on behalf of the Government to bring in an Amendment.

Mrs. Thatcher

The Chief Secretary is sparse in his sympathy tonight, so sparse that I was not sure to which section of my representations he was allocating it.

Mr. Diamond

To the third and last point which the hon. Lady raised, namely whether Surtax relief should continue to be given if the pensioner commutes his pension as opposed to disallowing it for an action not by the covenantor but by the covenantee.

Mrs. Thatcher

I am sorry that the right hon. Gentleman did not have sympathy for the other covenants as well, because it is important that we should try to include them in the Clause. The right hon. Gentleman said that representations had been made to the effect that covenants should be allowed where they were made for bona fide business reasons. That is different from a liability being incurred for "full consideration". I should have thought that "bona fide business reasons" allowed far more covenants to get by than would appear from the phrase the right hon. Gentleman chose. One could probably successfully argue that where there were solicitors in partnership in a comparatively small town it would redound very badly against the business if it were known that the existing partners did not look after former partners and the widows of former partners. Certainly a company which did not look after its former employees would not expect to have the good will of the surrounding locality and it would of course be allowed, albeit under a different Schedule and a different computation.

If the Chief Secretary is very unsympathetic we shall obviously have to return to the matter on Report. I am especially concerned, and ask him again, about covenants coming up this year for renewal. I can get a little sympathy on that narrow point? We have a special obligation there because people are now damnified by the Treasury whereas last year they were perfectly all right. I hope that the right hon. Gentleman will have second thoughts. I can assure him that my second thoughts on this subject will be exactly the same as my first. It would save him time on Report if he had second thoughts now.

Question put and agreed to.

Clause ordered to stand part of the Bill.