HC Deb 02 July 1968 vol 767 cc1344-53


Where a United Kingdom resident company borrows money in foreign currency in order to provide funds for its business and incurs a loss on exchange when the foreign currency liability is repaid, the loss shall be a deductible expense in arriving at the company's total profits for corporation tax.—[Mr. Richard Wainwright.]

Brought up, and read the First time.

Mr. Richard Wainwright (Colne Valley)

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

It is appropriate that we should be debating this Clause just after the previous one, since it also arises out of the great and rapidly growing importance of U.K. companies being able to borrow abroad where that is commercially expedient, as often now happens to be the case. I make no defence of the drafting, but the new Clause has been on the Paper during all the stages of this Bill and I hope that the Government have got the message—that here is a strange fiscal "No man's land" which should not be allowed to continue.

We are dealing with an important area, usually of business losses, but, I agree, conceivably of business gains, which at the moment falls between the two stools of Corporation Tax and Capital Gains Tax applied to companies. This is an area in which significant losses can be made, especially since devaluation. Yet the businessman, almost invariably to his surprise, find that this is a loss which he stands no chance of setting off against either Corporation Tax or Capital Gains Tax. There is, in fact, a substantial vacuum which is bound to lead to a sense of unfairness which will discourage firms from taking advantage of opportunities of foreign borrowing.

5.0 p.m.

The classic case which arises is that of a trading company which, with the encouragement of the Government— indeed, in certain circumstances at the insistence of the Government—has borrowed in a foreign currency, as the House has in recent years also enabled some nationalised industries and local authorities to do. The foreign currency having been borrowed, under the exchange control procedure it will usually have been converted into sterling at the then official ruling rate—say, before devaluation of last November. It is because the loan must be repaid in foreign currency that since devaluation a loss is almost certain to be incurred.

I am aware of one example of a very large loan which was turned into the Bank of England only two days before devaluation took place, so that the borrower had only two days' use of the money at the old parity and now faces the prospect in a few years' time of repaying at a very great disadvantage. I concede that in certain circumstances, if the Bank of England takes a favourable view and if the United Kingdom company expands rapidly in a foreign location, the firm will succeed in building up some reserves in the appropriate currency with which to pay off its borrowings. But that is by no means always the case—for example when the foreign borrowing is used for home trade purposes.

Thus, we are considering losses of significance and the question is whether these losses, economically and from the point of view of accounting, should be regarded as part of the true cost of a company's operations in the hiring of money. Undoubtedly this exchange loss is part of the true cost of hiring that money. If so, I cannot see why it should not be treated as an expense for Corporation Tax purposes. I agree that, theoretically, such a loss should be spread over a number of years, possibly over the whole period of the loan, and to achieve this should not be beyond the drafting powers of the Government.

I wish to make it abundantly clear that the Clause is not designed to carry any implication of further adjustments of the sterling parity. There is a sufficient volume of cases crying out for relief arising from the 1967 devaluation and I do not intend to imply that there will be further adjustments. The Clause is designed to deal with an unfortunate situation which has already arisen and which will cause traders some serious losses. Many traders have suffered losses to profits from devaluation in many other ways, but almost all of them at least have the comfort of knowing that these losses will be matched by their reduced Corporation Tax bill. I suggest that the House should take steps now to see that the kind of loss which I have been describing also receives its due measure of relief.

Mr. John Smith (Cities of London and Westminster)

I wish to speak particularly from the point of view of investment trusts. I should, perhaps, declare an interest, although I suspect that the majority of hon. Members have interests in investment trusts, as have very many thousands of our consituents. I hope that this is a matter which can be put right, if not now then in next year's Finance Bill.

The difficulty that arises here is yet another example of the anomalies and complexities that have flowed from the decision to tax investment trusts, as well as their shareholders, on gains and losses of this sort. Many investment trusts, with the active encouragement of the Treasury and the Bank of England, have arranged loans, for the most part dollar loans, although the Clause wisely refers to losses in all foreign currencies. They have in that way saved foreign currency for the country and have done a good service to the economy by their skill in the use of these loans.

How are losses or gains on loans of this sort assessed for tax purposes? I would like to give an illustration, but because of our procedure, both here and in Standing Committee, it is extremely difficult and cumbersome to do so orally. I believe that where we hold our Standing Committee proceedings is nothing like as important as the way in which we hold them. This is another debate in which the circulation of papers beforehand would have been useful. My hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) paid me the compliment of quoting what I said about our committee procedure when I described certain aspects of it as being like the machine on the pier which one must control, through a pane of glass, with two knobs. We are here trying in addition to deal with an extremely technical matter without memoranda having been circulated beforehand, which makes our procedure as cumbersome as playing chess by post. Therefore, if hon. Members will forgive me, I will not give an illustration now, although I gave one in Committee.

Suffice it to say that, because one cannot offset an increase or decrease in the sterling value of a dollar or other currency loan, investment trusts are liable to be taxed on a non-existent gain; or they may be taxed on a gain when they have made a loss. The Treasury is well aware of this state of affairs and has been sympathetic to it. Although I understand that it does not wish to consider the matter in exactly the way in which the Association of Investment Trusts would like it considered, I gather, from what was said in Committee and from remarks made subsequently, that it is willing to consider it in some way.

I hope that the Government will have further comments to make on this issue and I particularly hope that some provision will be made for those investment trusts which, with the active encouragement of the Government, have taken out dollar loans which are repayable this year, so that this problem confronts them before the introduction of next year's Finance Bill. If action on this matter must be deferred for a year, I trust that provision will be made for those who must face this problem before the introduction of next year's legislation.

Mr. Diamond

I will come to the comments of the hon. Member for the Cities of London and Westminster (Mr. John Smith), but first I wish to answer the question posed by the hon. Member for Colne Valley (Mr. Richard Wainwright). He asked me not to pay undue regard to the drafting of the Clause. I assure him that his meaning is clear. His proposal is that the expense which he wishes to be allowed as deductable should be deducted in arriving at a company's total profits for Corporation Tax purposes. What he is seeking, therefore, is Corporation Tax relief.

There is already Corporation Tax relief on losses on short-term loans. We are, therefore, concerned only with losses on long-term loans. Long-term loans are, by their nature, capital, and it would be extraordinary if anything to do with capital were a deduction for Corporation Tax purposes.

Were I to leave the matter there I would have answered the bare wording of the Clause, but I wish to go further, because the hon. Gentleman could, with respect, have made the case even stronger —and we have heard the discussions on these lines—had he referred also to relief for Capital Gains Tax. He is right in saying that with Capital Gains Tax there is a difficult situation which stems from the fact that a loan is not an asset and, therefore, the realisation of a loan, either at a profit or a loss, is not a sum assessable for Capital Gains Tax or relief from Capital Gains Tax. But the situation that the law already provides is broadly satisfactory, though not completely satisfactory to the hon. Gentleman. I shall deal with that point and, by going over the various steps, I hope to convince him that this is the case.

First of all—to repeat—very broadly, short-term loans would generally be allowable in computing trading profits, and anything relating to them and their repayment at extra cost involved would be taken in the ordinary way for Corporation Tax purposes.

In dealing with long-term, I should like, first, to deal with the situation in which a company has borrowed abroad in order to invest in productive facilities abroad. In that case, there are two reasons why one does not need to take any special steps. First, the borrowing would have been almost certainly allowed on the basis that it would be paid out of the earnings abroad, so no damage is suffered. The earnings abroad have repaid the borrowings abroad. No penalty has been suffered by the mere fact that the British currency has been devalued in the meantime. Secondly, there is an asset—or a series of assets —abroad which presumably corresponds to the borrowings abroad, and to the extent that a borrowing has to be repaid at an extra figure so do the assets when they come to be realised get repaid at an exactly proportionate figure.

The problem arises where the money has been borrowed abroad for investment in the United Kingdom. There, the foreign borrowing would have to be repaid at some time or other at an additional cost that is not matched by anything. I have, as I said in Committee, given the matter most careful and sympathetic thought, and the reason why we cannot recommend the House to accept a Clause giving special relief is that we cannot distinguish those transactions— there is a whole variety of them—entered into, not necessarily business transactions, in which business people have suffered through devaluation.

Further, one is entitled to assume that a company borrowing abroad for investment in this country must have had its attention on the risks of borrowing abroad, and one of those risks is variation in exchange rates. So one cannot regard this as a risk which was unconsidered when the transaction was entered into—

Mr. John Hall (Wycombe)

How would the Chief Secretary treat the case of a company which borrows large sums abroad with the intention of investing abroad but, at the insistence of the Bank of England, has to repatriate part of the proceeds back to this country—although it is still its intention to use those proceeds of the overseas loan for overseas investment—and, in the meantime, because of devaluation, incurs a loss?

5.15 p.m.

Mr. Diamond

I am sure, by the way in which the hon. Gentleman puts his question, that he has a specific case in mind where part of the investment was made abroad and part in this country. If it were split in that way—he says at the insistence of the Bank of England, but one would have to be careful about that, because it would be unusual for the Bank of England to insist that part of a borrowing abroad had to be used for investment in this country—

Mr. John Hall

I apologise for not making myself clear. In the case I put, the sum was raised abroad and part of the proceeds were repatriated here at the insistence of the Bank of England, although the intention was—and still remains—to use the whole proceeds of the loan in overseas investment.

Mr. Diamond

What the hon. Gentleman now makes clear is that, when the loan was raised, the borrower was aware that it would, at all events for the time being, be used for investment in the United Kingdom. I can only repeat what I said in the other case, and it is related to the other cases, that the business or the individual borrowing abroad would have these problems very much in mind.

Therefore, for the very strong reasons I have given, I do not think that one can possibly contemplate accepting a Clause which seeks relief from Corporation Tax, nor can I recommend what I understand is the much more difficult case of rejecting a provision under which companies or individuals borrowing abroad for investment in this country— where, admittedly, they would not get any Capital Gains Tax relief—for the extra cost of repaying the borrowing in due course. Nor can I recommend that even such a large reduced relief should be available.

I should like now to deal with the question raised by the hon. Member for the Cities of London and Westminster Here we are dealing with investment trusts. I undertook in Committee to bring forward proposals, either at this stage or in a year's time, to give relief in appropriate cases. The appropriate cases one had in mind were those where an investment trust, for example—and an investment trust would be the main example—borrowed abroad, and borrowed for the specific purpose of investing in investments abroad, and those investments were hypothecated in regard to that borrowing, and the investments were nominated in respect of exchange control.

If nothing were done in those specific cases, the situation which would arise would be that any increase in the investments arising out of devaluation would be subject to Capital Gains Tax in the ordinary way. But the additional cost of repaying the loan would not give rise to relief for Capital Gains Tax, because a loan is not an asset and is, therefore, outside the knowledge of the Capital Gains Tax legislation.

As the hon. Gentleman said, discussions have taken place, and proposals have been put to the Investment Trust Association which, let me say straight away, is free to comment as much as it likes but is not committed, although I think that I am right in saying that, in general, the proposals are not unacceptable to it. These proposals broadly meet the Association's point, so the Government will, in a year's time—it is obviously not possible to do it now— bring forward proposals after these matters have been discussed in full detail— because only preliminary discussions have taken place—with bodies which might be similarly affected.

I have particularly in mind life assurance companies which may have done precisely the same thing—borrowed abroad for investment in nominated securities and the investment hypothecated to the borrowing. After full discussions with such associated bodies, we will bring forward legislation next year which will give the appropriate relief.

As the hon. Gentleman has said, these are urgent matters which are happening this year, so I give the undertaking that such legislation would be retrospective. I think that it would have to be retrospective to the date of devaluation. I do not think that retrospection to 5th April is appropriate, but I will want to consider that matter more carefully. The intention is to give the relief obviously due in respect of the anomaly, which is a precise anomaly, clearly described, and would not, therefore, be mistaken for any other kind of obligation.

In those circumstances, I hope that the House will feel that I have carried out the undertaking which I gave to bring forward legislation on this occasion or in a year's time and that I have dealt adequately with the matter.

Mr. John Smith

Does the right hon. Gentleman propose to tackle only dollar loans, or loans in any foreign currency?

Mr. Diamond

The hon. Member himself put it in terms of dollar loans and, of course, dollars are the main currency under which this matter has arisen. I cannot see the distinction between borrowing in one currency and borrowing in another. I would not know by what process of law and equity one could distinguish. Therefore, once one lets oneself in for this kind of thing, one has to carry the argument to its reasonable and logical conclusion.

Mr. Barnett

I am not sure whether I have correctly understood my right hon. Friend. I understood him to say that a loan—a loss of a debt—could not be treated in the same way as a capital gain. What is the position if a man buys shares in a small company and he also buys a debt—a loan—in that company for less than the nominal book value, because the assets of the company make it worth very little? Suppose that later he realises it in full because the company makes profits. That is a debt on which he has made profits. Is that subject to Capital Gains Tax?

Mr. Diamond

I do not see why I should act as honorary unpaid adviser to my hon. Friend, for whom I have the highest and the most affectionate regard. I am not absolutely clear what my hon. Friend has put to me, because he referred to buying shares and he then referred to acquiring a loan which is one of the assets of the company. Presumably, he has acquired the company's net assets and liabilities through acquiring the shares. Therefore, the matter would not arise in that sense.

Perhaps I may help my hon. Friend as much as I can by saying that a loan is not an asset for Capital Gains Tax purposes. This was fully considered when the Capital Gains Tax was introduced. Therefore, a profit or a loss on realising a loan is not a profit or a loss which is subject to Capital Gains Tax legislation. If my hon. Friend will convert that to the particular circumstances which he has in mind, I am sure that he will come, as he always does, to the right conclusion.

Mr. Richard Wainwright

I welcome the undertakings given by the Chief Secretary on behalf of the Government on investment trust matters which have arisen during this debate. I also welcome the fact that it has proved an opportunity for the hon. Member for Heywood and Royton (Mr. Barnett) to get some top advice.

On the substance of the new Clause, however, I am extremely disappointed that the Chief Secretary persists in trying, as it were, to sweep under the carpet a matter affecting the growing trend of United Kingdom companies borrowing abroad, which the Government have encouraged during the last two years, in respect of the Air Corporations, the gas and electricity industries, the Greater London Council and other local authorities.

When the Chief Secretary says that we are dealing with a risk of loss which a borrower could have foreseen, I cannot see how this differentiates the matter from other items which are readily admitted as expenses for Corporation Tax or as losses for Capital Gains Tax. Many of the matters which are treated as business expenses or as a capital gains loss were risks which the taxpayer no doubt foresaw, but that does not prevent them being admissible when the risk comes all too true.

Secondly, the Chief Secretary said that there had been many sources of loss and suffering due to devaluation, implying that some of them could not be relieved because they cannot be precisely identified. That is their misfortune. In the Clause, however, we are dealing with a loss arising from devaluation, which can be precisely identified and which could, on an administrative basis, perfectly well be admitted either as a loss or as an expense.

This shows that we must return to the attack next year, but in view of the admitted difficulties of drafting on this occasion I beg to ask leave to withdraw the Motion.

Motion and Clause, by leave, withdrawn.

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