HC Deb 07 June 1967 vol 747 cc1218-9

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

Mr. Hordern

I hope the Financial Secretary to the Treasury will do us the honour of giving us as short and succinct an explanation of this Clause as did the Solicitor-General a few moments ago.

I understand that the Clause arose because of a decision in the courts in the case of a foreign resident bank which had invested in Government securities covered by Section 195 of the Income Tax Act, 1952. I should be grateful if the Financial Secretary could confirm that that was the reason why this Clause arose. In that case the Revenue suggested that moneys deposited with the bank in the course of its ordinary banking business could be said to be borrowed for the purpose of acquiring the securities within subsection (2) of Section 436. That view was rightly rejected by the Commissioners. It seems that this Clause is an attempt to prevent borrowing for this particular purpose, and we see no objection to it, especially as by subsection (11) there is no element of retrospection in it.

I should be grateful if the Financial Secretary would confirm that these views are correct.

Mr. MacDermot

It is correct that the occasion of the Clause was a decision— in fact of the Special Commissioners. The Revenue did not think it right to appeal to the courts. The decision was based on the wording of what is now Section 436 of the Income Tax Act, 1952.

I would not put the object of the Clause as being that we want to prevent bankers and others dealing in securities from borrowing in order to invest in these securities. All we want to provide is that, when they do, they do not get a double advantage and that the interest which they pay on moneys they borrow in these cases they shall not be able to deduct as expenses in arriving at the profits in addition to getting the tax-free advantage of exempt securities. That was the intention of the original provision in the 1940 Act re-enacted in 1952. But it was worded in this way, so that one paid only on moneys borrowed for the purpose of acquiring the securities. Obviously, when a banker is carrying on a business with many funds being lent to it and other funds being lent out, it is difficult in that flow to identify a particular borrowing of money with a particular relending.

Therefore, the practice the Revenue adopted from the start—and which everyone has accepted until now—was that provided they applied the disallowance, to the equivalent amount of borrowing everyone was satisfied, but it did not satisfy the strict wording. The Clause links the matter, we hope effectively, to the original intention, and to what has been the practice ever since 1940.

Question put and agreed to.

Clause ordered to stand part of the Bill,

Clause 23 ordered to stand part o] the Bill.