§ The Deputy Chairman
With this Amendment we can also discuss Amendment No. 177, in page 32, line 16, leave out first 'company' to end of line 37 and insert:'which is not a body of persons established for charitable purposes only unless the loan capital is "short-term borrowing" that is to say the loan capital is borrowed on terms that either the lender is entitled to be repaid on a fixed date not later than twelve months after the date of the borrowing or the lender is at the date of the borrowing and will at all times while any of the loan is outstanding be entitled to be repaid on demand or on not more than twelve months' notice; and where loan capital has been issued without payment of loan capital duty under the said section 8 by reason of its being short-term borrowing and the terms of the loan are subsequently varied in such a manner that if the date of the variation were the date of the loan the loan would not be short-term borrowing that section shall have effect as if the amount outstanding (otherwise than for interest) in respect of the loan at the date of the variation were an amount of loan capital issued immediately after that time'.111 Amendment No. 178, in page 32, line 21, leave out 'also so resident' and insert 'whether or not so resident' and Amendment No. 194, in page 32, line 28, after 'body', insert:'or an associate of a director as defined by paragraph 5 of Schedule 18 to the Finance Act 1965'.
§ Mr. Hall
Amendments 178 and 194 are rather technical, and small, points which I will deal with separately at the end of my remarks. Amendment No. 176, by deleting subsection (3), is the simplest way of ensuring that we maintain a clear distinction between borrowing which is chargeable and borrowing not chargeable—a distinction which is well established by Section 29 of the Finance Act 1934.
Amendment 177 is an alternative, and with our usual spirit of compromise we would be happy to accept this if the Government found themselves unable to accept the first Amendment. It is designed to exempt charities, which seem to be caught if the Clause is unamended, and, secondly, to exclude from loan capital duty such borrowing as the borrower can be called upon to repay within 12 months.
When the Chancellor stated his intention to bring loan capital duty into line with share capital duty he gave no reason for this, it was just a brief statement of fact. It was proposed, coincidentally, that the total cost of the stamp duty concessions given by the other Clauses, including £2 million concessions to local authorities and about £3,500,000 to house purchasers under the Clause that we have just been debating, should amount to about the same sum as the additional £6 million to be raised by this Clause. I am sure that it was entire coincidence.
The Chancellor did not tell us this. However, the Chief Secretary when he came to the Second Reading of the Finance Bill was a little clearer. He said:Clause 26 provides that the rate of loan capital duty, hitherto 2s. 6d. per cent., shall be the same as share capital duty, namely 10s. per cent. One of the repercussions of the effects of the introduction of Corporation Tax was that many companies which would have raised new money in the form of share capital now prefer to raise it in the form of loan capital. It seems sensible therefore that the level of duty should be equated."— 112 [OFFICIAL REPORT, 2nd May, 1967; Vol. 746, c. 345.]So much for the provisions dealing with the relief of taxation. It seems a little odd to those of us on this side of the Committee, although I am not sure that it necessarily seems odd to the Government side of the Committee, that to get themselves out of a difficulty created by their financial policy, they should now introduce a stamp duty measure imposing a further burden of £6 million upon those who wish to raise capital in this way.
However, if the reason given by the Chief Secretary is the real one, and it is not a question of raising revenue but of offsetting the cost of the concessions given by the other stamp duty Clauses, then, if the Government are not prepared to accept Amendment No. 176, they must surely be prepared to accept the alternative, Amendment No. 177, Clause 26 will make liable for duty very much borrowing which bears little resemblance to loan capital.
Furthermore, if Section 29 of the Finance Act, 1934, is substantially repealed, then the distinction between borrowing which is chargeable, and borrowing which is not chargeable will become blurred at a time when, because of the increase in duty, it is important that the distinction should be absolutely clear. The definition of loan capital for the purpose of the charge is contained in Section 8(5) of the Finance Act, 1899, and it might be for the convenience of the Committee if I read this, because it shows what a wide area is covered.
The relevant section reads:In this section the expression "loan capital" means any debenture stock, county stock, corporation stock, municipal stock, or funded debt, by whatever name known, or any capital raised by any local authority, corporation, company, or body of persons formed or established in the United Kingdom, which is borrowed, or has the character of borrowed money, whether it is in the form of stock or in any other form, but does not include any county council or municipal corporation bills repayable not later than twelve months from their date or any overdraft at the bank or other loan raised for a merely temporary purpose for a period not exceeding twelve months, and the expression "local authority" includes any county council, municipal corporation, district council, dock trustees, harbour trustees, or other local body by whatever name called.We have seen from that that this particular section covers a very wide variety 113 of borrowing indeed. It is virtually all borrowing. The most important exceptions that will remain after the Bill is enacted is any overdraft at the bank or other loan raised for a merely temporary purpose for a period not exceeding 12 months.
It is that last case which creates some difficulty. Liability to loan capital duty, like any other stamp duty, has to he determined when the chargeable instrument, in this case the statement of loan capital, is executed. In many cases, it will be difficult to say with certainty that borrowing is temporary, for a period of less than 12 months. This can create an area of uncertainty, with the scrupulous taxpayer placed at a disadvantage in relation to the unscrupulous taxpayer, or the taxpayer with a more flexible mind, which is the modern jargon for these things.
What is needed is an objective test. If 12 months is to be taken as the dividing line between short and long-term borrowing for the purposes of the Section which I have read out, then the objective test could be that set out in Amendment 177, which is the alternative Amendment, namely, that borrowing which may be called in within 12 months, whether or not it is called in within that period, can be regarded as short-term borrowing.
This would compare with a bank overdraft and be a reasonable test. Amendment No. 177 does not refer to exemptions provided for in subsection (3) in the Bill, because the Amendment, if the Government are prepared to accept this alternative, would mean that borrowing within a group and directors' loans would be short-term borrowing with the definition.
I do not want to take up the time of the Committee with this point, which I am sure is well understood by the Minister. We find it difficult to understand the desire to bring within the definition of loan capital the very wide variety and form of loan covered by Section8(5) of the Finance Act, 1899, I am sure that it was not intended to make it quite as wide as that. Because we believe that the Government welcome an opportunity to limit the extent to which this Clause penalises the raising of loan capital of various forms, we tabled the Amendment. If it cannot be accepted as it is drafted, the point will no doubt be seen, and the Government will make some attempt to 114 reduce the liability which they are now imposing.
§ 4.30 p.m.
§ Referring to Amendment No. 178, a practice has developed in legislation granting tax reliefs on transactions within groups of companies requiring that all companies concerned must be resident in the United Kingdom. Consequently, when an overseas company controls two separate United Kingdom resident companies, the reliefs which would otherwise have been available on transactions between those two companies are denied solely because the parent company is not resident. In some cases, as will be appreciated, overseas parent companies have, for good commercial reasons, incorporated separate United Kingdom subsidiary companies. There seems to me to be no reason why transactions between the United Kingdom subsidiaries should not attract tax reliefs available for inter-group transactions.
§ On Amendment No. 194, in taxing statutes as a whole, I think that I am right in saying that the reference is to director or an associate of a director. Should not that phrase be used in the Clause, or is there some reason why it is not used?
§ Mr. Nott
I support what my hon. Friend the Member for Wycombe (Mr. John Hall) has said on subsection (3), which cancels, except in special cases, the definition given by Section 29 of the Finance Act, 1934, to loan capital as capital capable of being dealt in on a Stock Exchange in the United Kingdom. Without this definition, bank loans for more than 12 months would become, by implication, liable to loan capital duty under Section 8 of the Finance Act, 1899.
The United Kingdom, in accordance with Government policy, is making increasing use of medium-term loans, particularly in foreign currency, so that United Kingdom subsidiaries abroad can finance their capital expenditure overseas by borrowing in foreign currency. Unless this point is clarified, some inhibition may be placed on borrowing in foreign currency by United Kingdom companies operating overseas. This is contrary to Government policy, which is to encourage non-sterling borrowing abroad.
Moreover, Report No. 34 of the Prices and Incomes Board on bank charges, 115 which no doubt we shall hear a good deal more about, calls for greater diversification by the clearing banks of their activities and, in particular, suggests that they should undertake mortgage loans and medium-term commitments. I look forward with great interest to the retort of the clearing banks to this Report and, perhaps, their proposal that, in accordance with Mr. Aubrey Jones's suggestion, they should start competing for deposits in the market. I shall be very interested to see the reaction of the Chancellor of the Exchequer to a suggestion that they should issue certificates of deposit. Nevertheless, an imposition of 10s. per cent. capital duty on a two-year bank loan—by implication, two-year bank loans would be caught, I think—would be serious.
Take a leading company which is borrowing at ½ per cent. over Bank Rate. If it borrows from a clearing bank for two years it will have to bear an additional ½ per cent. over two years—in other words, an additional a per cent. per annum—on the cost of the borrowing. I cannot believe that it is the Government's intention to catch two-year bank loans. Perhaps the Joint Under-Secretary of State would clarify this point about bank loans.
§ The Joint Under-Secretary of State for Economic Affairs (Mr. Harold Lever)
My right hon. Friend the Chancellor of the Exchequer intends to assimilate the duty on loan stock, and the like, with the duty on ordinary share capital. I will deal later with the question, should it be in order and relevant, about whether the Chancellor of the Exchequer is seeking to make good a loss to the Inland Revenue by increasing the stamp duty, but be it enough to say at the moment that all that we are trying to do is to achieve a certain amount of logic, namely, that when a company raises capital, if it is to pay stamp duty on the raising of permanent capital, it should pay the same rate on one lot of capital as on another.
If there is an argument arising from the Finance Bill, it is that in the case of loan stock the company pays less tax on its profits than it would if it issued the same proportion of ordinary stock. But this is not relevant to the question. It 116 is simply a matter of attempting to bring about a common sense change in the stamp duty rate so that it is at the same level. The Opposition could well contend that the way to achieve this would be to level down. Normally they are, very properly, levellers up and they must not complain that in this case the reasonable thing to do is to level up.
When I listened to the persuasive moderation of hon. Members speaking on these Amendments, an old Latin tag came in to my mind, "Nemo repente fuit turpissimus", meaning that nobody can achieve the summit of vice at one bound, nobody can achieve the superb professional obduracy of a Treasury Minister overnight. If I find myself listening objectively to the Opposition's arguments, I hope that they will not regard it as a precedent which will last for a long time.
However, I am bound to say that the arguments on the question of short-term borrowing seemed cogent. It seemed to me that if we left the matter as it stood there would be an anomalous division between the short-term borrowings which will remain exempt and others which are equally entitled on the same principle but which will not be exempt.
It should be borne in mind that the original exemption—the 1934 Act exemption—which is being abolished was granted so that associated companies might borrow from each other without incurring stamp duty. However, the draftsmen of those days, who had not achieved the meticulous skill of modern Parliamentary draftsmen, drafted at the wrong point. They drafted the provision so that there was exemption as long as a transaction was of such a description as to be incapable of being dealt with on the Stock Exchange. It does not seem to me that this is a very relevant point of distinction for the purpose of exempting loan stock.
While the exemption which is being taken away by the subsection is rightly being taken away, it would not be enough to leave the matter there. I promise the hon. Member for Wycombe (Mr. John Hall) that we will consider the point very carefully and sympathetically. We shall consider the question of giving such exemption to short term borrowings as would bring them all into line and would give people greater certainty in the application of the stamp duty.
117 We shall take into account what was said by the hon. Member for St. Ives (Mr. Nott), who raised the real difficulty that if 10s. per cent. stamp duty were charged on two-year borrowings through a bank, this would defeat the clear purposes of the exempting subsection. In these circumstances, I hope that the hon. Member for Wycombe will withdraw his Amendment, because Amendments 178 and 194 would not be very relevant if we made a concession of substance on Amendment 177.
I ought, however, to make clear that this sympathy does not, oddly enough, extend to charities. Nobody has advanced a particular case in favour of charities having stamp duty exemption of this kind. From a purely technical viewpoint, it is difficult for the Inland Revenue to administer a stamp duty exemption for charities. The Inland Revenue can administer an Income Tax exemption much more readily. With the Income Tax exemption, the Revenue can ensure that although charity begins with the Inland Revenue, it does not end at home. With stamp duty, there are technical difficulties which make it difficult to ensure that the benefit of the concession is actually applied for charitable purposes.
As, however, no substantial case was made on that point, I hope that the hon. Member will feel able to withdraw the Amendment. We will certainly do our best on Report to meet the points which have been raised.
§ Mr. John M. Temple (City of Chester)
Would the hon. Gentleman care to say that he will take into account loans made within the surrender value of life insurance policies in the same way as he will take into consideration bank loans?
§ Mr. Lever
We are talking at this point about loans issued by companies and not about borrowings by individuals. I take it that the hon. Member wants me to consider the borrowing by companies on insurance policies. They must be very rare. If, however, they qualified within the exemptions suggested by hon. Members in this discussion, to which I have lent a sympathetic ear, of course they would qualify, too.
§ Mr. John Hall
I am certain that the Committee fully appreciates and regards with sympathy the difficult transitional 118 period through which the Minister is passing. Coming from his position as one of the most forceful critics of the Government on financial matters, he now finds himself in the position of defending Government decisions. We appreciate that it will take time for him to settle down and develop the usual stonewalling tactics of the rest of the Treasury Bench.
In the meantime, we are happy to take advantage of the hon. Gentleman's reasonable approach to this matter. I must express to him my own and, I am sure, the Committee's thanks for taking such a reasonable attitude towards our Amendment. On the understanding that on Report the Treasury Bench will bring forward something which goes a long way towards meeting the point which we have raised, I beg to ask leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§ Mr. Harold Lever
I beg to move, Amendment 37 in page 33, line 21, at the end to add:(5) Subsection (1) above shall apply to loan capital issued on or after the said 1st August notwithstanding that a statement relating to it (whether or not with other loan capital) was delivered pursuant to the said section 8 before that day, and the additional duty chargeable by virtue of that subsection shall in such a case be payable on the day on which the capital in question is issued; and where duty in respect of a mortgage or marketable security has been paid on a trust deed or other instrument executed before the said 1st August and securing loan capital any part of which is issued on or after that day, the duty chargeable under the said section 8 as respects that part by virtue of subsections (1) and (2) above shall be payable on the day on which it is issued, but shall be reduced by an amount equal to the excess of the duty paid on the trust deed or other instrument over that which would have been payable on it if it had not secured that part.
§ The Deputy Chairman
With this Amendment we can discuss Amendment No. 179, in line 21, at end add:(5) Subsection (1) above shall apply to loan capital issued on or after the said 1st August notwithstanding that a statement relating to it (whether or not with any other loan capital) was delivered pursuant to the said section 8 before that day, and the additional duty chargeable by virtue of that subsection shall in such case be payable on the day on which the capital in question is issued; and where duty under the heading 'Marketable Security' or that beginning 'Mortgage Bond, Debenture, Covenant' has been paid on a trust deed or other instrument whether executed before, on or after the said 1st August and securing loan capital any part of which is issued on 119 or after that day, the duty chargeable under the said section 8 as respects that part by virtue of subsections (1) and (2) above shall be reduced by an amount equal to the excess of the duty paid on the trust deed or other instrument over that which would have been payable on it if it had not secured that part.
§ Mr. Lever
My Amendment adds to the Clause to cover the transitional difficulty that somebody might issue a loan stock before 1st August and only collect his money afterwards. This provision will ensure that the full rate of 10s. per cent. will be payable on the money which is raised after 1st August. Assuming that the Committee passes the Clause, that would presumably be the intention of the Committee.
There is no excessive avarice on the part of the Inland Revenue in this matter, because where a debenture, for example, is issued by instalments, the Inland Revenue will treat the issue of the stock as the issue of the debenture and there will be no further duty payable even though the whole of the price is not paid before 1st August next, provided that the instalments to be paid are incorporated in the debenture and that it is issued to the lender before 1st August. This is a commonsense transitional period which the Amendment covers and I hope that the Committee will accept it.
§ 4.45 p.m.
§ Mr. John Hall
The Government's Amendment goes some way towards removing a defect in the Clause, but I cannot understand why the relief which is given by the Amendment should be limited to instruments executed before 1st August. In our Amendment No. 179, we would like to modify this by the addition ofwhether executed before, on or afterand by the omission of the wordsshall be payable on the day on which it is issued",which in any event seem to be superfluous. That is designed to enable the relief to be applied to instruments which are executed on or after, as well as before, 1st August.
The second part of our Amendment is designed to avoid a possible source of ambiguity. In lines 5 and 6, the Chancellor's Amendment uses the words, 120 "mortgage or marketable security." We would replace those words by the same words as are used in subsection (2) of the Clause.
In many cases, duty will have been paid on a trustee securing unsecured loan stock. Such a document, I understand, is neither a mortgage nor a marketable security, but it is liable to the same duty under the heading which begins, "Mortgage Bond, Debenture, Covenant". If this phraseology is used in subsections (2) and (5), it could be argued that it was intended to convey a different meaning in each case. To remove the ambiguity, we have included the different words in our Amendment.
§ Mr. Harold Lever
Our consideration of all the points which were raised on the previous Amendment will involve redrafting the Clause, and in so far as any consequential Amendment is required to give effect to the principle which I outlined on the Amendment, it will be taken into account when the Clause is redrafted.
In those circumstances, I trust that the Committee will agree to the Amendment as it stands and, when the Clause is redrafted, take into account the other matters which are properly thought to be adjustable. Whatever is the appropriate consequential Amendment will follow.
§ Amendment agreed to.
§ Question proposed, That the Clause, as amended, stand part of the Bill.
§ Mr. Nott
The Clause appears to me to conflict in one respect with Clause 28. My reading of the Clause is that it would make a United Kingdom company which issues bearer bonds denominated in a foreign currency liable to capital duty of 10s. per cent. in accordance with the Clause, whereas the effect of Clause 28 is to exempt from duty of 3 per cent. under the heading "Bearer Instrument" all issues of this type. In other words, Clause 28 rightly abolishes stamp duty on bearer bonds for issues denominated in foreign currency, but in the case of a British company borrowing overseas it makes the position worse than it was before.
As I said on an earlier Amendment, in his 1966 Budget speech the Chancellor of the Exchequer encouraged British firms like I.C.I., B.P. and others to borrow abroad in foreign currency to finance 121 their expenditure overseas. As I read Clause 26, it would make I.C.I. and B.P. liable for the 10s. per cent. capital duty for which they were not liable before.
There was a specific instance of this in December last year when B.P. borrowed 25 million dollars abroad. B.P. was able to satisfy the Inland Revenue and the Treasury, I think wrongly, that its issue was a foreign loan security. This is an unsatisfactory system whereby the Inland Revenue indulges in extra-statutory legislation. The Inland Revenue told B.P. that its loan in dollars would qualify as a foreign loan security under Section 60(1) of the Finance Act, 1963, because it was neither offered for subscription in the United Kingdom nor offered for subscription with a view to sale in the United Kingdom.
On the basis of an undertaking with regard to Section 60(1) of the Finance Act, 1963, British Petroleum, and I.C.I. before it, borrowed overseas in dollars without being liable to the 3 per cent. bearer bond duty. Now, in accordance with Clause 26, they would be liable for the 10s. capital duty on their borrowing overseas in foreign currency. Therefore, it conflicts with the admirable Clause 28 which we shall come to presently, and I would ask the Minister to look into this, because it must be an error on the part of the draftsman.
§ Mr. Harold Lever
I will look into it, though I am not persuaded that there is anything to look into. The hon. Gentleman said that someone persuaded the Revenue, wrongly in his opinion, to take the view that the borrowing last year was not dutiable. My first answer to that is that anyone who is able to persuade the Revenue wrongly that a stamp dutiable transaction is not dutiable will enjoy the same privileges, whatever Amendments we make to our legislation. If his case is that last year the law enabled a British company to borrow abroad in dollars without incurring stamp duty, I should have thought that that was not the case. Without notice of the points I should not care to express a more final opinion. In my view, the Clause does not change the law in this regard.
What Clause 28 does is quite different. It exempts from stamp duty bearer bonds issued abroad in certain circumstances. 122 The intention is to give the relief which my hon. and learned Friend the Financial Secretary will explain. I should be called to order if I were to leap into Clause 28, particularly as I signed an Amendment last year in the sense of Clause 28. As my hon. and learned Friend will be outlining Clause 28 to the Committee, I cannot go into details. However, I must say, provisionally, that borrowing by British companies, whether at home or abroad, is dutiable unless it is exempted by the kind of exemption that we have been discussing which already exists or may exist when we have brought in a suitable Amendment on Report.
§ The Deputy Chairman
If the point relates to Clause 28, I think that it would be more appropriate if the hon. Gentleman waited until the Question, "That the Clause stand part of the Bill" on that Clause before pursuing the matter.
§ Mr. Nott
Mr. Irving, when we come to the Question, "That the Clause stand part of the Bill" on Clause 28, I shall answer the hon. Gentleman's point. I do not believe that it is the intention of the Government under Clause 26 to impose a duty of 10s. per cent. where a United Kingdom company borrows in foreign currency overseas. I do not think that that is the Government's intention, because, previously, under section 60(1) of the Finance Act, 1963, such a British company borrowing overseas in foreign currency by means of a foreign loan security was not liable to any duty, and I do not think that it is the Government's intention to charge them with a 10s. duty now. I am told that, under Clause 26, they will now be liable for the 10s. duty.
§ Mr. Harold Lever
They will, but that was always the position as I understand it. If there is an exemption due to anyone under Section 60(1) or some other Section of some other Act of which I have not had notice, this Clause will not take that concession away. The position remains as it was in that respect. The benefits of Clause 28, which are partly the result of the hon. Gentleman's interventions on previous Finance Bills, should be discussed in their proper time.
§ Question put and agreed to.
§ Clause, as amended, ordered to stand part of the Bill.