HC Deb 02 July 1968 vol 767 cc1338-44


  1. (1) Subject to subsection (2) below, in section 52(5) of the Finance Act, 1965 (conditions in which payments of interest to non-residents are charges on income for corporation tax) paragraph (b) (under which the liability must have been incurred wholly or mainly for the purposes of activities of the trade carried on outside the United Kingdom) shall apply to interest which is payable in the currency of a territory outside the scheduled territories as if in that paragraph the words ' carried on outside the United Kingdom' were omitted.
  2. (2)Subsection (1) above shall not apply where—
    1. (a) the trade is carried on by a body of persons over whom the person entitled to the interest has control, or
    2. (b) the person entitled to the interest is a body of persons over whom the person carrying on the trade has control, or
    3. (c) the person carrying on the trade and the person entitled to the interest are both bodies of persons, and some other person has control over both of them.
      • In this subsection the references to a body of persons include references to a partnership, and 'control' has the meaning assigned to it by section 87(1) of the Capital Allowances Act, 1968.
  3. (3) In section 138(1) of the Income Tax Act, 1952 (income tax provisions comparable to the said section 52(5)(b) for paragraph (b) (payment of interest to be secured on trading assets abroad) there shall be substituted the following paragraph—

'(b) that either—

  1. (i) the liability to pay the interest was incurred wholly or mainly for the purposes of activities of the trade carried on outside the United Kingdom, or
  2. (ii) the interest is payable in the currency of a territory outside the scheduled territories, and '.

(4) In this section (including the amendments made by this section) ' the scheduled territories' means the territories specified in Schedule 1 to the Exchange Control Act, 1947 as for the time being in force.

(5) This section shall apply for income tax purposes for the year 1968–69 and subsequent years of assessment, and for corporation tax purposes to accounting periods ending on or after 6th April, 1968.—[Mr. Harold Lever.]

Brought up, and read the First time.

4.45 p.m.

Mr. Harold Lever

I beg to move, That the Clause be read a Second time.

The Clause is one of fairly wide general and commercial interest, and I had better explain something of its nature.

It is intended to secure that a trader, whether company, individual or partnership, will henceforward be entitled to a deduction against taxable trade profits for payments of interest in non-sterling currencies on moneys borrowed abroad for the purposes of a trade at home. The Clause also brings Income Tax rules into line with those of Corporation Tax by providing that, henceforward, individual traders and trading partnerships will be entitled to a deduction in respect of interest paid abroad on moneys raised for the purposes of the trade abroad without, as hitherto, any requirement that the payment of the interest must be secured upon assets of the trade abroad.

It is the first part which is the point of general interest. The second merely eliminates the old anomaly. The purpose of the first part of the Clause is to put English companies into broadly the same position as almost all other companies in other parts of the world, namely, that if they borrow money from abroad on long-term borrowing they would be entitled to charge the interest against their trading profits and, on the other hand, that they would be entitled to pay to non-residents the interest without deducting tax. Practically every other country among the great trading nations has this facility, and it seems anomalous that we should not have it. It would appear to be advantageous to make the facility available to British companies, since I have had a great many representations indicating that English companies would find this a valuable option. I stress the word "option", because no one is driving companies to borrow abroad.

Hitherto, if they borrowed abroad to finance their trade at home, they would have been penalised by being unable to deduct long-term interest from their profits for the purposes of Corporation Tax. It was particularly anomalous that this should be so since, if they borrowed at short, they had no problem. If they borrowed in a risky manner and contrary to their commercial interests at short-term, they were allowed all these facilities which will now accrue to them under the Clause at long-term. It seemed anomalous to force companies to borrow at short against their wishes when they might have preferred medium or long-term, and the Clause puts the matter right by placing long-term loans on the same footing as regards the deduction of the interest from their profits for the purposes of Corporation Tax.

There are other technical provisions with which I will not weary the House permitting the Revenue to ensure that interest payments gross are not made to United Kingdom residents but only to overseas residents. I know that the Clause will be welcome by the City. It will enable it to play an ever-increasing part in the European capital markets. There appears to be no reason why it should be restricted to playing that part on behalf only of foreign customers. It should be able to serve the needs of British industry at home in a similar way.

Mr. Patrick Jenkin

We welcome the appearance of the new Clause, which represents a significant change in the taxation of interest paid on loans overseas. It seems to recognise the reality of a good deal of overseas investment these days which is made under direct Government pressure out of money borrowed abroad rather than by the remittance of sterling from this country.

My only question arises from the way in which the Clause is drawn. The new concession applies only to loans raised outside the scheduled territories, which is a reference to territories outside the sterling area. As I understand it, the voluntary scheme for restricting overseas investment in the developed countries of the sterling area is as much part of the Government's policy as the statutory restrictions on overseas investment. Therefore, if, in order to further our export trade, a firm is encouraged to raise a loan locally instead of investing sterling overseas and it invests it in, say, warehousing, why is it that the ability to pay the interest gross and claim the full deduction does not equally apply? In other words, is there a distinction, for the purposes of the new Clause, between the scheduled territories and countries outside? There may be a perfectly good explanation, but it does not leap to the eye and it would be helpful if we could have an explanation.

Apart from that, I warmly welcome the Clause. We appreciate the Government having decided to meet the legitimate case on behalf of many companies in the City of London and elsewhere.

Mr. Barnett

I, too, warmly welcome the new Clause. We all know, for example, of people not being willing to invest here in the past because of having to receive the interest net rather than gross. Has my hon. Friend done any calculation as to what difference this might make to the pattern of foreign investment here—for example, what the effect might be on 3½ per cent. War Loan, which foreign investors are prepared to invest in because they get the interest gross, whereas otherwise they would not be willing to do so? Has my hon. Friend considered whether there is likely to be any major variation in the pattern of investment in this direction?

Mr. Harold Lever

On the first point, about the sterling area, there are two reasons; one is a revenue reason and one is a practical reason. From the revenue point of view, it has to be subject to certain safeguards before we allow interest to be paid gross to a non-resident, or even to a non-resident, if it is payable within the sterling area. Nothing, of course, would stop a United Kingdom citizen from so arranging his affairs that his own money comes back, in certain complex circumstances, by a circular route. He might, as it were, end up getting interest on his own money gross. That is not possible in relation to non-sterling borrowing, because that must be in a foreign currency and the exchange control barrier would protect the circuitous route.

Even then, I should have been prepared to consider the point were it not for the fact that it is not normal for the sterling area to provide capital for Britain. It is the other way around. The United Kingdom has traditionally been the supplier of capital on cheaper terms to the scheduled territories than can be raised locally.

It is unlikely that a United Kingdom firm would borrow in Australia, for example, to finance its United Kingdom business, which is the only thing affected by the new Clause. Under the existing law, one is always allowed to charge the interest if borrowing in respect of foreign assets and a foreign business. The only case which could be raised is that of a United Kingdom company seeking to borrow in Australia to finance its United Kingdom business. We think that that is unlikely, and, because of the revenue reason—on which I do not place too much emphasis—we are disinclined to open a hypothetical possibility for which there would not appear to be any practical demand on good grounds.

As to the comment of my hon. Friend the Member for Heywood and Royton (Mr. Barnett), I should make clear the nature of this concession. It is in respect of borrowing by United Kingdom companies in foreign, that is, non-sterling, currency outside the scheduled territory currency. Therefore, of course, the War Loan situation is not comparable. A foreigner can invest in it and receive his interest gross because he invests in it in external sterling, but of course it would not make it possible—perhaps one day we could consider this—for example, for a foreigner to invest in the Rolls Royce debenture and get the benefit of the Clause. Any benefit he would secure on receiving his interest gross as a nonresident would depend on a complex of circumstances but would not be affected by the Clause because, for example, the Rolls Royce debenture is couched in sterling.

This is essentially a Clause which permits United Kingdom companies which wish to borrow money abroad in non-sterling to do so and removes the disadvantage which they have previously had of not being able either to charge against the Corporation Tax or to pay the interest gross to a non-resident—

Mr. Barnett

But, for example, it might well be possible for Rolls Royce to raise its debentures in a foreign country at perhaps a lower rate of interest and pay it gross to the non-resident, in which case it would be allowable under the Clause.

Mr. Lever

If that is what my hon. Friend has in mind, that is the purpose of the Clause—to give wider options to a United Kingdom company to be able to say, "If we want to, it would suit our book better to borrow in dollars in the Eurodollar market or in Deutschmarks in Germany or in Swiss francs", and it could do so, virtually, as easily as borrowing in England in sterling. This might affect the pattern of investment, since it would tend to unify the already vastly expanding European capital market.

One of the reasons that I welcome the Clause is that it seems odd that we should isolate ourselves by irrelevant tax mechanics from the ordinary full participation of what will develop, I think, into a total European capital market, long before the actual entry of Britain into the Common Market. Our able City financiers and bankers have played a notable part in the development of that market and it seems a unifying gesture to allow them to operate in it without unnecessary restrictions.

Mr. Barnett

Would it not be as well to extend it further by way of allowing all non-residents to receive both debenture interest and dividends as well? The principle is the same—to receive their interest gross.

Mr. Lever

On interest, there are facilities, which are not relevant to the Clause, whereby a non-resident can, in certain circumstances, get his interest gross, but I should be happy to discuss this with my hon. Friend. Even investing in sterling, he might be able to do that in certain circumstances. Dividends are a different matter, relating to the question of international practice and to what is desirable on balance in those circumstances. We already exempt non-residents from United Kingdom Income Tax on dividends. All they pay is a withholding tax, and normally the same withholding tax which our shareholders in their companies pay when they receive dividends. That seems about right. It might seem odd that we should give our dividends free of withholding tax to, for example, American investors, when we, investing in America, can suffer a 15 per cent. withholding tax. The ding-dong of double taxation arrangements requires that we should get as much concession from the other side as we are prepared to give, and we should not voluntarily give away a withholding tax which our citizens are not receiving.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

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