HC Deb 15 July 1969 vol 787 cc503-32
(1) Relief shall be given in respect of any payment of interest falling due before 6th April 1975 on a debt incurred on or before 15th April 1969, being annual interest—
(a) on which the recipient is chargeable to tax under Case III of Schedule D, and
5 (b) which is not interest on a debt incurred by overdrawing an account with the creditor,
where both the date when the payment fell due and its amount were fixed by or under arrangements made when the debt was incurred, or subsequent arrangements in force on 15th April 1969.

There is no principle. Once again we have a piece of anti-avoidance legislation which has gone far wider than it need have done and which, therefore, has to be justified by reference to some sort of principle. Yet when one deals with the cases of hardship—this is a case of hardship, whatever the Chief Secretary may say; if this relief were non-existent under the new Clause, it would be a case of hardship for the people concerned—one finds oneself with no discernible principle left.

We shall seek to press the argument further in the debates on the Amendments to Clauses 18 and 19. Suffice it to say now that we welcome the Clause, though we would like it perhaps to have been a little more liberal, particularly with regard to the period of one year which it specifies. The Government must recognise, however, that by tabling the Clause and granting this welcome and necessary relief, the absence of which would create hardship, they are eroding any principle that Clauses 18 and 19 may have had in the first place.

I have no doubt that the Chief Secretary disagrees with almost every word that I have said.

Mr. Diamond

indicated assent.

Mr. Jenkin

I am grateful for the right hon. Gentleman's ready assent to my last statement. But the fact of the matter is that I am right and there are very few people inside or outside the House who have had much to say in favourable comment upon the logic of the Chief Secretary's argument on Clauses 18 and 19.

Question put and agreed to.

Clause read a Second time and added to the Bill.

10 (2) Relief shall be given in respect of any bank, discount or stock exchange interest paid after 5th April 1970 if, assuming that it had been paid without deduction of tax when it became due and payable, relief could have been given in respect of it under section 200 of the Income Tax Act 1952.
15 (3) Interest eligible for relief under this section shall be deducted from or set off against the income of the person paying the interest for the year of assessment in which the interest is paid, and income tax shall be discharged or repaid accordingly.
—[Mr. Diamond.]

Brought up, and read the First time.

Mr. Diamond

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

Mr. Deputy Speaker

I understand that it will be for the convenience of the House to discuss at the same time certain other Amendments, as follows:

Amendment (n) to the new Clause, in line 2, leave out '1975' and insert 1995'.

Amendment (o) to the new Clause, in line 3, leave out 'under Case III of Schedule D, and' and insert 'or '.

Amendment (ee) to the new Clause, in line 8, at end insert— Plovided that where an overdrawing consists partly of a fixed debt and partly of a fluctuating debt, then relief shall be given under this subsection in respect of interest on the fixed part of the debt.

Amendment No. 31, in Clause 18, page 19, line 38, at beginning insert— (1) Notwithstanding anything to the contrary in this Act, relief shall continue to be given for interest paid by an individual under a liability incurred before 16th April, 1969, as if this Act had not been passed, except that tax shall not be deducted from any interest paid after 5th April, 1970 (unless section 20 of this Act applies) and relief shall be given, if the individual paying the interest so claims, by deducting or setting off the interest against his income for the year of assessment and income tax shall he discharged or repaid accordingly. Relief shall not be given both under this subsection and any other part of this Act.

Amendment No. 32, in Clause 18, page 20, line 8, leave out 30th June 1969 ' and insert— 'the passing of this Act'.

Amendment No. 34, in Clause 18, page 21, line 3, leave out 30th June 1969' and insert— 'the passing of this Act'.

Amendment No. 307, in Clause 21, page 24, line 40, at beginning insert: (1) Notwithstanding anything to the contrary in this Act, relief shall continue to be given for interest paid by a close company under a liability incurred before 16th April, 1969, as if this Act had not been passed, except that tax shall not be deducted from any interest paid after 5th April, 1970 (unless section 20 of this Act applies) and relief shall be given if the close company paying the interest so claims, by deducting or setting off the interest against its income for the year of assessment; and tax shall be discharged or repaid accordingly. Relief shall not be given under both this subsection and any other part of this Act.

It has been suggested also that, if the House agrees, we could conveniently discuss at the same time the following Government Amendments:

Amendment No. 212, in Clause 18, page 20, line 38, leave out from or ' to if ' in line 39 and insert: 'section ("loans made on or before 15th April 1969") of this Act'.

Amendment No. 213, in Clause 18, page 21, leave out lines 13 to 15 and insert:

  1. (a) to interest on any debt incurred after 15th April 1969, and
  2. (b) to interest paid after 5th April 1975 on a debt incurred on or before 15th April 1969.

Amendment No. 215, in Clause 18, page 21, line 24, leave out from first ' 1970 ' to end of line 26.

Mr. Diamond

I am sure that it will be for the convenience of the House, Mr. Deputy Speaker, if we accept your wise suggestion. I shall explain the Government Amendments in my speech.

In coming to new Clause 28, we come to the question of hardship. To everything said hitherto about hardship by the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) I have, fortunately, turned a deaf ear. I say "fortunately" because if one had restricted the case for estate duty relief to those cases where hardship had been proved, there would have been very little in the concession which I broposed and which the House has just lbeen good enough to accept. I, therefore, outlined a quite different case, as I did in Committee, which the hon. Member for Scarborough and Whitby (Mr. Michael Shaw) himself elucidated. We come now, however, to the question of hardship.

In moving from one system to another, one must reserve to a Government the right to say that Finance Bills come each year, or sometimes more often, and they must have freedom, in their responsibility for managing the country's economy, collecting revenue and providing for public expenditure, to introduce new taxes notwithstanding that individual citizens may have entered into commitments and arrangements on the basis of the tax as it then was and in the hope that the tax would continue in the same form and with the same effect.

Although one must reserve to any Government the freedom to do that, a wise Government must in appropriate cases—on is not creating a precedent here or departing from principle—have regard to all circumstances. The circumstances of a change of the kind we are proposing are unusual and infrequent. They are in unusual and infrequent in the sense that for a good long time we have had a system under which interest on loans qualified for relief from tax purposes, where tax was paid, and we are now moving to a system under which that will not apply as regards the private individual.

I had, therefore, turned over in my mind, having listened carefully to the representations made in Committee, what was the best way of meeting any possible hardship which might arise. I am sure that the best way is to have regard to firm commitments which the individual taxpayer has entered into in the confident expectation that the law would remain unaltered. I repeat that we cannot maintain that state of affairs for him, but we can see to it that as far as possible the transition from one régime to another takes account of hardship so far as may be reasonable and appropriate in the particular circumstances of the case.

8.15 p.m.

We had already taken that element into account in the proposals put in the Bill in the first place. It was proposed as regards bank overdrafts not that the interest should cease to qualify immediately the Bill was introduced or on Budget day but that it should cease to qualify at the most convenient date somewhat ahead, namely, the end of June this year, as which date banks have the habit of calculating the interest in ques- tion for the year or half-year. As regards loans, we had proposed that interest should continue to qualify until 5th April next year.

It was suggested—a considerable point was made of this—that there would be many taxpayers who had entered into firm commitments—I repeat "firm commitments"—and who would not be able to adjust their affairs with reasonable convenience by 5th April next. I say "reasonable convenience" because part of the purpose of the new proposal was to encourage a reduction in borrowing, or, in a positive sense, to encourage the habit of saving. In that sense, therefore, we could not accept that there should be no difficulty however small.

Having listened carefully to the representations put to us, we have come to the view that it would be right to give a somewhat longer period—in my view, a considerably longer period—for that adjustment to take place so that individual taxpayers could without undue inconvenience adjust their affairs. We propose, therefore, that interest paid on a loan incurred before Budget day should continue to be allowable not until 5th April, 1970, but until 5th April, 1975. That is practically six years from the time when borrowers first had notice of the new provisions.

The reception of this proposal has been mixed. I have received a fair amount of criticism that the Government have gone too far in providing for that length of time and that a period somewhere between 1970 and 1975 would have been adequate. When legislating for the whole of the population, it is impossible to legislate in such a way as to meet every possible argument. Perhaps one has gone a little on the generous side. Nevertheless, that is our proposal which I put to the House now.

Now, a point of machinery quite distinct from the point of principle. It was proposed that tax deduction at source on loan interest should cease on 5th April next. That proposal remains. As regards machinery, therefore, relief on interest on loans qualifying until 1975 will be given by deduction at source until April 1970 and by variation of the assessment or adjustment in the P.A.Y.E. coding from then until April, 1975. That is a minor matter of machinery, but inasmuch as it does not move forward the same five years as the principle of meeting hardship does, I thought it right to mention it here.

You have been good enough to say, Mr. Deputy Speaker, that we should discuss other Amendments at the same time. Having regard to our experience on the first group of Clauses and Amendments, I think that it would be more convenient to allow hon. Members who have put their names to them to speak to those matters, and I shall speak only to the Government Amendments, the first of which is No. 212. This is a small, consequential Amendment. Amendment No. 2E; is also a consequential Amendment, and Amendment No. 215 is proposed in consequence of the extension of relief on the interest for old loans.

Mr. Nott

I welcome new Clause 28, and have no mitigation of my welcome to put forward. I want merely to ask for clarification on a number of matters.

My first question arises from the Chief Secretary's comment that he had been criticised for selecting 1975. I do not necessarily expect him to answer this question, but I would be fascinated to know who could have criticised him for selecting that date rather than 1970, other than perhaps the Chancellor or the Inland Revenue. I cannot think that anyone in possession of a loan could criticise him for choosing it.

Mr. Diamond

Two senior Privy Councillors on this side of the House immediately come to mind.

Mr. Nott

I am grateful to the right hon. Gentleman for making it clear that it came from his right hon. Friends, because I was surprised at this criticism.

The first of my main points relates to the normal endowment policy. Probably a major proportion of the savings generated in the private sector find their way through such a policy. This means of saving, together with house mortgages and perhaps deposits with building societies, is crucial to this country's prosperity. Anything which discourages the taking out of endowment policies must be detrimental to the country.

Since the endowment is effectively one of the principal ways in which people save for a rainy day, what does subsection (1)(b) mean? Does it mean that the person who has an endowment policy will have interest allowed for tax relief only if he borrows up to the total surrender value of the policy, or that if he is borrowing against his endowment policy up until 1975 he will also be allowed against tax interest on money which he borrows over and above the surrender value?

A person may take out an endowment policy and five years later have a minor financial crisis of his own and decide that he wishes to borrow against the security of the policy. It is not clear to me, or to one or two people in the insurance world to whom I have spoken, whether subsection (1)(b) enables such a person to borrow only up to the surrender value of the policy at that time—in other words, the amount he has put in—or whether it allows him to borrow an additional sum on the security of the policy up until 1975.

My second point concerns education policies. The Chief Secretary said that the Chancellor had tabled the Clause to try to avoid hardship to some extent. I remember the rather unruly brawl we had in Standing Committee on the question of insurance companies and the undertaking given in a previous Finance Act. If the right hon. Gentleman was thinking of education policies and trying to remove the hardship there, the 1975 date does not go quite far enough. It would not be unusual for a parent to take out the normal education policy when his child was two, and the normal age for a child to go to a private preparatory school is eight. Under the normal type of policy, the one most used, the parent would seek to borrow against the policy at almost precisely the moment the Clause runs out, because it has about six years to run. On the very day the child arrived at school the six years would have expired. Just at the moment when the parent first needed to borrow against the policy, he would be debarred from doing so.

That is quite a fair example. If a parent had taken out such a policy five or six years ago, he might just be all right. But if he had taken it out even two years ago I think that he would not be covered by the 1975 date. I do not necessarily go for the rather exaggerated date of 1995 mentioned in Amendment (n), but it would have been a much more valuable concession on education policies to extend the date rather further than the six years the right hon. Gentleman has chosen.

I now come to a slightly more technical point—the question of when the debt referred to is incurred. There are several schemes for share purchase— the London and Manchester, the Yeoman, and one other. Let us consider the London and Manchester scheme for borrowing against a policy for share purchase. One of the reasons underlying the Government's policy on overdraft interest was to cut down borrowing for share purchase.

8.30 p.m.

I do not agree with the Government's attitude towards this. I understand that this is one of the objectives which they seek. All that we are trying to do is to protect a person who had taken out a policy with, say, the London and Manchester, secure in the knowledge that insurance policies of this sort would be able to continue. We were not discussing the retrospective nature of the thing in a legal sense but, as the Chief Secretary has said, in a hardship sense. I know one person who took out an endowment policy attached to a share purchase scheme, and the shares were bought between 29th March and 2nd April this year.

We might assume that this person is all right on the debt at least up to 1975 but the settlement date for Stock Exchange purposes was 27th April. This is a crucial matter for this individual and he inquired of the Inland Revenue what the position was. I can give the Chief Secretary the gentleman's name later if he wants it, the reference on the letter is PS1452/69. The Revenue replied, no doubt seeking to protect its position: In the Board's view a debt for money lent is not incurred until the lender has actually paid the money. I do not understand that interpretation. It may be valid legally, but I would have thought that the debt would in practice have been incurred when the contract was entered into, not at the time of completion. Many of my hon. Friends are lawyers and they may he able to put a different interpretation upon this. It is a loophole and I wonder whether it has been covered.

The Chief Secretary was keen to remove all matters of hardship. This is not just generosity on his part, there is also the fact that the Financial Secretary made this controversial statement in last year's Committee, which was something we discussed early in the morning. The Government have rather more than just an obligation to make a concession here. They could in some respects be deemed to have completely misled certain people who took out insurance policies and who now find themselves in a quite different position. Even though this now extends to 1975, it still does not cover first of all the endowment policy which extends for 15 years or maybe 25 years, and secondly it is not clear to me or to several people in the insurance companies to whom I have spoken whether (1)(b) enables people to borrow up to the surrender value only or beyond that value against the security of the policy until 1975. Thirdly, although this concession has been made—I have used the word "concession" erroneously—

Mr. Diamond

Could I ask the hon. Gentleman to be a little clearer when he says "borrowing up to 1975" on this insurance policy question? Does he mean Interest on a loan borrowed, which loan interest ranks for relief up to 1975, or does he mean new borrowing after 1969, and made some time during a period between 1969 and 1975?

Mr. Nott

Let us say an endowment policy was taken out on 14th April, 1969, the day before Budget day. Then in 1974 this individual had some minor financial crisis, or alternatively, it may be an endowment policy taken out to pay educational fees. If the individual then borrows up to the surrender value of the policy, is that allowable? After all, the money is his, it is money he has already paid in.

Secondly, if he borrows beyond the surrender value these words by overdraw an account with the creditor are open to all sorts of interpretation and can lead to difficulties. Insurance companies to whom I have talked regard it differently. Can the right hon. Gentleman look at the question of commitments entered into which straddle Budget day? Maybe a contract was entered into for 15th April but actual completion did not take place until 22nd April.

Mr. A. H. Macdonald (Chislehurst)

I should like to extend my welcome to the new Clause. In Committee a number of hon. Members on both sides offered thoughts on this topic, and I ventured to make a few remarks. The Chief Secretary listened to the arguments and has now come forward with the Clause. I wish, from the back benches on this side of the House, to express appreciation of that.

I differ from the unknown, unnamed Privy Councillors on this side who think that the Chief Secretary has gone too far. I do not think that he has. If I had been responsible for fixing the date, I should have chosen 1976 rather than 1975. In Committee I confined myself to the effect of the new provisions in the Bill on fixed-term borrowing. My right hon. Friend may be interested to know that it is within my experience that there are transactions of that nature which extend over seven years. Seven-year transactions would have been entirely covered if 1976 rather than 1975 had been the operative date. However, I shall not press that point because it is a minor detail and there are not many such seven-year transactions.

I hope that it will not be thought ungracious if I say something in mitigation of the general welcome which I give to the new Clause. It relates to fixed-term borrowing agreements to which I referred in Committee. As I understand it, the effect of the new Clause, taken with Clause 18, will be that in April next year finance houses which now have on their books fixed-term borrowing agreements will be under an obligation to recast those agreements. I am advised that currently there are 2 million such agreements. Therefore, an appreciable number of that 2 million will be current at that time.

A certain amount of work will be involved for the finance houses. They will have to get into touch with their customers to advise them of the instalments now payable gross. No doubt this will occasion some surprise to those borrowers and correspondence will have to ensue and the borrowers, assuming that they agree, as they will have to do eventually, will have to find an additional amount of cash because they will be paying cash gross. They will get in touch with the Inland Revenue to claim the relief which will be available to them after April, 1970. The Inland Revenue will have to make the necessary computations to allow the relief for which they will qualify. There will be an appreciable amount of work for the finance houses, some work for taxpayers and a not inconsiderable amount of work for the Inland Revenue. The net product of all that additional work will be to produce exactly the situation which exists now without it.

If the principle of new Clause 28 is accepted, would it not have been possible simply to allow existing agreements to run until they expire on the present basis of paying the instalments net? Surely that would have been much more simple administratively. I understand that approaches have been made in this connection. I am advised that the reply was that there was no administrative difficulty in allowing the existing agreements to run and that it is simply a matter of policy whether to adopt the method set out in the new Clause or, as I suggest, to allow the existing agreements to run until they expire.

It is possible that there is a good reason for adopting this method, and I should be more than grateful if my right hon. Friend would say what those reasons are. On the face of it, it would seem to be simpler to allow the existing state of affairs to continue until lie agreements which are now current have expired, and for agreements subsequently coming into force to come under the new provisions.

Mr. Michael Shaw

The right hon. Gentleman based his case in advancing new Clause 28 on the des re to alleviate hardship as distinct from the reasons which he put forward for the previous new Clause. I thank him for the fulsome way in which he honoured his promise in the Committee to give sympathetic consideration to the question of estate duty.

A very different consideration arises on new Clause 28, as the right hon. Gentleman has said. The new Clause by no means deals with all the hardship that will arise in relation to bank interest. I will, if I may, give one or two simple examples.

I give first the example I gave in Committee of the young director of a close company who was offered shares in the company because it was realised that he would be an important man in the company in the future. It was arranged that he should borrow money from the bank to enable him to buy the shares. In the last few months the question has arisen whether the interest on that loan would continue to be allowed against his income for tax purposes, and we have not until this weekend known this for certain. It now appears that it will not be allowed because the director does not have a 5 per cent. share in the company.

One can now advise him to buy more shares so that the interest on the loan will be allowed, but if he cannot do that he will be under a pressing need to get rid of his bank overdraft.

That man is suffering hardship, first, because interest will not in future be allowed, as his interest represents less than a 5 per cent. share in the capital. Secondly, neither he nor his advisers could make up their minds whether or not the bank overdraft would have to be closed down until this weekend, after 30th June, which is the closing date. There would have been a strong case for extending the date until it is known for sure what will be the final shape of the Clause.

My other example concerns a director in a close company who is not a full-time director but one who gives a considerable amount of time to the company, and who has been instrumental in providing share capital to enable the company to continue and to expand. He subscribed part of the share capital as the result of an arrangement with the bank whereby he borrowed the money, and it was understood by all parties that the overdraft would be reduced only gradually and would be repaid over a considerable time. Because that person will not in future be able to set interest on that loan against his income, he will be hard put to it to find the cash to repay the loan immediately. The repayment of the instalments to which he is committed will be the more difficult to find because he will have to pay the interest on that loan out of net income and not out of gross income.

8.45 p.m.

Such situations arise and can cause hardship in relation to bank interest. Events have proved that 30th June was far too early a date to fix for interest on bank loan since after the introduction of those modifications the whole shape of the Clause has been completely changed, with the result that people could not reach a final decision before 30th June. Although I welcome new Clause 28, I believe that it has not gone far enough.

Mr. John Smith (Cities of London and Westminster)

I do not welcome the Clause because, like my hon. Friend the Member for Scarborough and Whitby (Mr. Michael Shaw), I feel that it does not go nearly far enough. We have heard today a great deal about principle, and indeed many principles have been advanced. The chief principle of the Chief Secretary, so far as I understand it, is that interest should be allowable for businesses but not for individuals.

Why should there be a distinction between business borrowing personal borrowing? There are various possible explanations. Is it puritanism? Is it to be the rule that one can have an overdraft to conduct one's business but cannot have an overdraft to conduct one's life—or if one does have an overdraft one must pay more for it?

What is the logic of the distinction between business borrowing and personal borrowing? For example, my investment trust can borrow to buy a Canaletto to put on the walls of my office and the interest will be allowable for tax. But if I borrow to buy a Canaletto to hang on the walls of my house the interest is not allowable for tax. The principle seems to be the wrong way round.

Why should there be these two rates of interest, a high rate for individuals and a low rate for businesses? Is this what Socialism is about? What do the hon. Gentlemen on the other side think about this, or, to put it in the subjunctive, what would they think about this if they were here? Further, if we are to have differential interest rates—it is something of which this country, to its great credit and prosperity, has steered clear for longer than have many foreign countries —why are we now to put a premium on not paying one's tax? I have not heard that the rate of interest on unpaid tax is to go up; and as that was never allowable for tax, it now becomes a great deal cheaper than borrowing from a bank to pay the tax. No doubt this has been catered for.

The Chief Secretary, having pursued his principle, said in Committee … it is inevitable … that a great advantage enures to a business man … which the private individual … is denied". I do not see why it is inevitable, but if it is, certainly that is not a principle. It is an effect, but not a principle.

To pursue the possible reasons for this, the Chief Secretary also said: When we reintroduce a provision of this kind it is just as well to have an established procedure which is clear in the minds of those who have to operate tax both on the side of the Revenue and the side of the taxpayer. That is an unexceptionable statement. Bt.t we have seven pages of Clauses in the Bill, seven pages of new Clauses in the name of the Chancellor on the Notice Paper, ten and a half pages of Schedules and 15 pages of Amendments. In those circumstances, surely this cannot come under the heading of a clear and established procedure.

The right hon. Gentleman went on in Committee: I have heard nothing which would cause confusion or difficulty in the carrying-out of the tax in the way in which it is proposed to he carried out. I hope that Inland Revenue inspectors throughout Britain will note those words; indeed, I hope that the Horse Marines will note them. They will be asked to distinguish between different types of borrowing, which even a customer's own bank cannot do in many cases. These poor inspectors will have to distinguish between improvement and maintenance, and I well remember that the difficulty of distinguishing between the two was given as one of the reasons for abolishing Schedule A.

I once had a letter from a constituent illustrating the point. He told me that he had had some repair work done to a pillar supporting a bay window in his house and, unfortunately, his builder sent in a bill for moving the pillar. For the purposes of Schedule A, it would have been an improvement if it had been moved but maintenance if it was merely repaired. The inspector had to be satisfied that it was a genuine mistake on the part of the builder. Surely we have not reached the point where relief is given on interest on money borrowed to add to one's house, but not on money borrowed in order to mend the roof. I cannot be, lieve that that is a Socialist principle or a good one.

Furthermore, this is yet another example of that type of provision which erodes honesty. An example was given in Committee, though not apropros this point, of a shopkeeper who borrows to buy a chair for his shop, in which case the interest on that loan is allowed. But suppose that his wife moves the chair into the parlour. If he and his wife sit on the chair in the parlour, they are crooks. I can imagine that shopkeeper seeing his wife carry the chair from the shop into the parlour and prepare to sink onto it. He will cry out, "Don't do it!" and then they will have to discuss whether the money was borrowed to buy the chair before or after the date in this Bill and whether the sum was raised by way of loan or overdraft.

Another principle which has been mentioned, though not as a chief one, arises from the Chief Secretary's statement in Committee that … the purpose behind the whole of the Clause is that money shou'd be more difficult to borrow and not easier to borrow.— [OFFICIAL REPORT, Standing Committee F, 18th June, 1969 c. 299, 338, 335 and 349] I have never understood the blithe assumption that borrowing -js always advantageous but always bad, like so many other things in life which are agreeable but forbidden. I have never thought that that applied to borrowing. Has it applied to borrowing over the past few months? I suggest that a customer who had been prevented by his bank manager from borrowing to buy equities over the past few months would be grateful.

I should have thought that this assumption was more a Freudian confession of failure. It is a confession that it is now better to have anything rather than money, and that again is a principle which I do not accept and do not believe should be encouraged.

Furthermore, and another reason why the new Clause is not sufficiently wide, the overdraft system is one of those great British commercial inventions which has contributed enormously to our prosperity. It is an immensely practical and economical way of harnessing the liquid resources and cash of the entire country. It will be greatly damaged by the new Clause.

We have heard again today, although I did not notice it when reading through the Committee proceedings, a distinction between borrowing with a "firm commitment and borrowing, presumably by way of overdraft, without a firm commitment. The original distinction, when dealing with crucial dates, was said to be a question of liquidity—the ease with which one could repay an overdraft. That is sensible. If it is not easy to repay an overdraft owing to the nature of the assets against which it has been borrowed, it is right that one should have a little longer in which to repay the borrowing.

We now have a new principle, the "firm commitment". Is a mortgage a firm commitment? I imagine that most hon. Members would say that a mortgage was a very firm commitment. But a mortgage is repayable at much shorter notice than many overdrafts. How, therefore, are we to settle on a firm commitment as the principle which can divide one type of borrowing from another? What also seems to have been completely ignored is that some loans cannot be repaid early. They are firm commitments in which there is no provision for early repayment. Indeed, they often contain a penalty clause, if there is early repayment, and the penalty can be equivalent to a steep increase in the rate of interest.

Another principle which has been mentioned is that of reducing consumption. This could well work the other way. My hon. Friend the Member for Worthing (Mr. Higgins) touched on the notion which I am about to explain when he said that if people are allowed to borrow up to a certain percentage, whether they need it or not they will borrow to that limit. That is profoundly true. It was proved during chocolate rationing after the war. Because people had a chocolate ration they bought it and ate it. When the ration was abolished, consumption went down. That will undoubtedly be the effect with borrowing.

In the same way, many people who are obliged to pay off their overdrafts will have larger incomes, because most overdrafts nowadays are charged against assets which yield less in income. If the generality of customers of the bank in which I worked were forced to pay off their overdrafts, which have been a healthy brake on their consumption, I feel sure that their consumption would increase. In the days when bank statements were healthily printed in red—at least mine always were, although the Chief Secretary probably does not know what that means—I always found that they acted as a healthy brake on my consumption. Now that is to disappear.

If the purpose is to discourage consumption, what is then wrong with borrowing to speculate? Speculation has nothing to do with consumption. Interest on borrowing to speculate, if we are out to stop consumption, should be allowed, because the two things are completely separate. I suspect—

Mr. Brian Harrison (Maldon)

On a point of order, Mr. Deputy Speaker. Is it right that such an important debate should proceed with fewer than 40 Members present?

Notice taken that 40 Members were not present;

House counted, and, 40 Members being present—

9.0 p.m.

Mr. Smith

I am grateful to my hon. Friend for that heroic attempt to obtain an audience for me.

Hon. Members

The hon. Gentleman will lose it now.

Mr. Smith

The part of my speech which emptied the Chamber related to this search for a principle behind the Clause, and I think that probably the real principle is a wish to curb speculation. For many years I worked in an ordinary deposit bank. For a good many of those years I used to conduct the half-yearly audit of all the loans and overdrafts, and very tedious it was. It took several days, in the course of which one examined every loan and overdraft, what they had been taken for, and what they were secured again. I assure the Chief Secretary that even in the bank in which I worked, whose customers I suspect the right hon. Gentleman would think are particularly prone to all the activities of which he disapproves, it was exceptionally rare to find anyone who borrowed in order to speculate. Far the commonest cause of borrowing which appears to be of that nature is borrowing out of laziness, and I think the Chief Secretary will find that he has done a good turn to many people whom he does not want to help at all by obliging them to put their houses in order.

My hon. Friend the Member for Worthing spoke of the shotgun approach, of the Government's principle that to bring down a target in the crowd one lets off a shotgun, and if a few innocent people are peppered it cannot be helped. In my view, that is a false analogy. But I think that the Chief Secretary is like a man who is startled by a noise in the night and leaps up and lets off his gun at what he believes to be a burglar—and it turns out that there is no burglar there at all. There is no target for this legislation. All that the right hon. Gentleman has done is to pepper his family.

I believe that the Clause will have further damaging effects on the economy. It will encourage people to invest further in non-income-producing assets, which is something I deplore, and which is bad for the country. Hitherto, if someone borrowed to invest in non-incomeproducing assets, and he had no other income, or not sufficient income, in effect he paid a very much higher rate to do so than if he borrowed to buy income-producing assets, which are what make the country "go". Now there will be no difference between the cost of borrowing to buy income-producing assets and the cost of borrowing to buy non-income-producing assets. This will give a further shove in that undesirable direction.

Finally, there is one more principle which has been advanced—by us—and it is the correct principle, namely, that if a man has assets, and he is borrowing money on which he pays interest, he does not own the whole of those assets, and therefore he does not own the whole of the income derived from them. The Chief Secretary said that he does not accept that, which I feel classes him as a financial flat-earther.

There is an analogy here. If the Chief Secretary uses the argument that a man's assets and his borrowing cannot be set off together for income tax purposes, will he next year introduce legislation to say that a man's borrowing and assets cannot be set off for estate duty purposes? Estate duty is not levied on the gross estate. This principle is recognised when assessing people to estate duty. How can a distinction be drawn between assets when it comes to estate duty and assets when it comes to income tax? That principle, which has been advanced before and which I advance again, is the correct principle. In short, for the sake of an imaginary bogey we are plunging our wretched productive people still further into a morass of legislation. They will be left struggling in that morass while happier and more sensible countries do not subject their productive citizens to this obstacle race—do not subject their industrialists to three-legged egg-and-spoon races run in sacks. For the sake of tilting at an imaginary bogey, the right hon. Gentleman has taken us a long way further down that road.

Mr. Graham Page

Before my hon. Friend the Member for the Cities of London and Westminster (Mr. John Smith) started to speak, I thought that I had only one problem with the new Clause. I now have so many problems that I do not know where to start. My hon. Friend has shot so many holes in the new Clause that it is looking like a bit of Gruyère cheese.

My problem is contained in Amendment No. 307, which relates to Clause 21. My question is: does new Clause 28 cover the loans and interest referred to in Clause 21? That Clause deals with the special provisions for certain close companies in connection with the allowance of interest as a deduction from taxable income, and the Clause starts by saying that "all" interest of a close company shall be apportioned … as if the interest were income of the close company …". The Clause then goes on to say to what companies and to what interest the Clause applies and does not apply. The Clause contains no exemption for interest upon a loan which has already been taken and under which, before the Finance Bill was published, the borrower was already obliged to pay interest.

The Amendment would relieve the close company in the case where liability was incurred before 16th April, 1969 and interest continued to be payable in respect of the loans. We have heard from the Chief Secretary that new Clause 28 is intended to relieve those who have entered into a firm commitment. [Interruption.] My hon. Friend has just asked whether a mortgage is a firm commitment. I should have thought that there could be little doubt about that. It must surely be a firm commitment. But where a close company has borrowed before the publication of the Bill from an individual, a building society or an institution like an insurance company, will it get the benefit of new Clause 28?

I do not understand the provisions in new Clause 28 which place a restriction on its application. It will give relief only in cases where the recipient is chargable to tax under Case III of Schedule D. It will give relief only when it …is not interest on a debt incurred by overdrawing an account with the creditor…". Will a close company borrowing from an institution, being obliged to pay interest on that borrowing and having entered into that obligation before having knowledge of the Bill, get relief under the new Clause?

Mr. Diamond

Would the hon. Gentleman tell me the purpose of the borrowing of this close company? Was it for business purposes?

Mr. Page

A close company is not likely to borrow for personal reasons, and I assume, therefore, that as it is in business it is borrowing for trading purposes.

Mr. Diamond

As I will do my best to answer the hon. Gentleman's question, I want to be sure that I have understood it. Indeed, I do not understand why he is pursuing the matter if he is referring to borrowing for business purposes.

Mr. Page

Have I the Chief Secretary's assurance that Amendment No. 307 is unnecessary and that a close company, when borrowing for such a purpose, will be relieved under the new Clause or that the new Clause does not affect a close company because it gets its relief elsewhere? Since Amendment No. 307 is being discussed with the new Clause, I assumed that it had something to do with it.

Mr. Diamond

According to my hearing, the Chair did not say that Amendment No. 307 was being discussed with the new Clause.

Several Hon. Members

It is.

Mr. Page

I have the list of selected Amendments and new Clauses, and I assure the right hon. Gentleman that it is included. The purpose of Amendment No. 307 is to make sure that a close company which had entered into an obligation before 16th April by borrowing money and had entered into an obligation to pay interest on it will be relieved from the provisions of Clause 21(1). I have asked a simple question. I may be naïve in asking it. I hope I am and that the right hon. Gentleman will assure me that the close company will get relief.

Mr. Patrick Jenkin

Before my hon. Friend the Member for Worthing (Mr. Higgins) comments on the general remarks of the Chief Secretary and the new Clause, I wish to refer to Amendment (ee), a starred Amendment which Mr. Speaker has been kind enough to select.

The purpose of this Amendment is to consider the question of an overdraft where the borrower has a loan account with the bank and a fluctuating overdraft but where, for obvious reasons of saving cost and for administrative convenience, the two have been combined into one. The Chief Secretary shakes his head, but I am told that this is a perfectly normal arrangement. A customer at a bank has an overdraft which fluctuates—under new Clause 28 this would not be allowable—but he may have a loan account. He borrows £10,000 and agrees to pay it off over 10 years at £1,000 a year. I am told that it not unusually happens that for simplicity's sake the bank runs only one account with the fluctuating limit kept on and with the reduction of the outstanding part of the loan account up to £1,000 a year. 9.15 p.m.

I understand, and my hon. Friends more familiar with banking matters will no doubt confirm, that if a bank manager insists on keeping a separate loan account with separate entries for repayments that is to be taken as in some way a reflection on the credit of the borrower. This is intended to impose a more stringent discipline on the borrower than if there were only one account. The Chief Secretary may not accept this as being usual, but I ask him to accept it as usual for the purpose of the debate. If this happens the new Clause as drawn would prevent the allowance of relief on any interest, even on the fixed part of the overdrawing, the indebtedness, the part which if it were a separate loan account would qualify.

The purpose of Amendment (ee) is to enable a distinction to be drawn between the fixed part of the account and the fluctuating part so that the interest chargeable on the part of the account represented by the fixed loan will be allowed up to April, 1975, whereas the part of the interest applicable to the fluctuating part of the overdraft would not be allowable. I fully recognise that the wording of the Amendment may not be wholly adequate, but I believe the point is a sound one.

If it is the case that the less creditworthy borrowers are obliged by bank managers to have a separate loan account, the result of the Clause as drawn would be that the less credit-worthy would qualify for relief on their loan account, whereas the more credit-worthy, who have the two accounts lumped into one, would find that their interest is disallowed over the whole. I cannot believe that is the intention of the Government, yet it appears to be the meaning of the Clause.

Mr. Higgins

My hon. Friend the Member for Wanstead and Woodford (Mr. Patrick Jenkin) and I are in some danger of appearing as "The Gondoliers" in Gilbert and Sullivan's opera of that name, but we thought it would be better to act on the excellent principle of division of labour by confining ourselves to individual Amendments attached to new Clause 28.

We welcome the fact that the Chancellor has seen fit to table this Clause, but the attitude of sweet reason which the Chief Secretary adopted in Committee by saying that he would listen to all the arguments and in due course sort out the Bill if the Government thought that necessary is not a satisfactory way of legislating. A number of points covered by the new Clauses we are considering should have been included in the Bill when it was originally drafted. It is not necessary to go into elaborate procedure to realise that many of those points must have been perfectly obvious and the Government ought to have taken account of them in the first place.

There is a particularly unfortunate aspect of this qua this new Clause, because many people, perhaps underestimating the persuasiveness of the Opposition, or for some other reason, may already have given up policies, particularly educational policies or policies of the London and Manchester type to which my hon. Friend the Member for St. Ives (Mr. Nott) referred, in the expectation that the Government had firmly made up their minds when they introduced the Bill in the first place and were not likely to introduce a new Clause of this kind.

I have enormous sympathy with people who have acted in this fairly rapid fashion. I think that it is a consequence of the fact that the Government have seen fit to bring in what is almost a draft Bill and then sought to amend it with many more new Clauses than there were original Clauses covering this aspect. Particularly in view of what my hon. Friend the Member for St. Ives said—unfortunately, my hon. Friend is unable to be with us at this time—if the Inland Revenue is to engage in correspondence defining on what date the loan is taken out-and I am sure that the Inland Revenue must have added heavy qualifications of the type, "Subject to the Bill's going through"—this is a point which must be borne in mind.

I want very quickly to ask one or two specific questions of the Chief Secretary, who has rightly pointed out that the purpose of the Clause is to alleviate hardship, in the sense that people have undertaken commitments and then suddenly find that the law on which they were relying is being changed by the Bill. My hon. Friends have on the Notice Paper an Amendment which seeks to lengthen the period over which existing contracts shall continue to enjoy relief from income tax from 1975 up to as far ahead as 1995.

My own view is that, clearly, if the contract exists it should run indefinitely, but it would probably be wrong for us to go into the Lobby in support of this Amendment, because we have made it clear that we disagree with the whole concept of the Government's measure in principle. If we were to vote on this kind of Amendment, we might be in much the same position as we seem to have got into on S.E.T., where if we say, "We shall abolish it as soon as possible", people think this is less strong than saying. "We shall abolish it." Therefore, it would be wrong for us to vote on the Amendment, but I believe that it is wrong to impose a limit on this and that the right solution is to alter the whole principle on which the Chancellor's conception of this question is based. Amendment No. 31 covers the open-ended point. Amendments Nos. 32 and 34 seek to alter the original expression in the Bill which suggests that the subsections shall apply from 30th June to the date when the Bill becomes law.

In page 20, line 6, the word "all" still appears. It is rather difficult to reconcile this with the new Clause, because, if I understand it correctly, this means that all the interest is disallowed, and then the new Clause will apparently exclude some. The Chief Secretary might care to give attention to that point.

At all events, this new Clause and the many other new Clauses should not be referred back to 30th June, 1969. One would have thought that they should operate from some future period beyond the time when the actual part of the legislation was introduced in the House. We therefore hope that the Chief Secretary will see his way to accepting those Amendments.

I come to the interpretation of the words in line 6 of the new Clause: when the payment fell due and its amount were fixed by or under arrangements made when the debt was incurred, or subsequent arrangements in force on 15th April 1969 ". I should have thought that it would be possible to improve the drafting by deleting the words when the debt was incurred, or subsequent arrangements and simply saying "a debt which existed on that date".

What is the position if payment falls due on a debt which has its amounts fixed but the amounts reduce steadily? As I understand the Government's intention, it is that the contract shall have been a firm contract, not one which alters. It is surely possible to have a contract which is quite firm but the amounts payable and the total amount in fact reduce. It seems that this may not be covered by the new Clause as drafted, and I should appreciate the right hon. Gentleman's comments on it.

Subject to that, we consider that this is at least some improvement on the position as we found it in Committee, and we welcome the new Clause.

Mr. Diamond

The hon. Member for St. Ives (Mr. Nott)-who has passed me a courteous notice explaining his in- ability to be here at the moment—raised questions based on his assumption that borrowing which took place after the date of the Budget but arising out of an insurance policy entered into prior to the date of the Budget, which may have contemplated some borrowing taking place, was borrowing which attracted qualifying interest. That is not so. We are concerned only with interest on a loan which arose before the date of the Budget.

My hon. Friend the Member for Chislehurst (Mr. Macdonald) raised a matter of which I am well aware. The representations which he made have been brought fully to my attention, and I myself went into the matter at length to see whether we could meet the difficulty which he raised. It would be wrong for my hon. Friend to assume that there are no administrative difficulties. It is impossible to deal specifically and exclusively with the cases which he has in mind, which are fairly numerous from the standpoint of particular finance houses, though small in relation to the totality of cases. It is impossible to deal with them exclusively from other cases.

I was fully aware of the difficulty. I wish that it could have been met. I am satisfied that great care and attention has been given to it. It has all my sympathy. I am sorry that I cannot find a way to meet it. I hope that my hon. Friend will realise that there is no lack of desire or attention here implied. It just does not seem possible to meet that temporary difficulty, which will arise over the next two years, probably, in those cases. However, I assure him that, inasmuch as what is exercising the mind of the finance houses is their relationship to their customers and their wish that borrowers will keep up their commitments in the new circumstances, I shall see to it that there is full co-operation between the Revenue and the finance houses so as to assist in the fulfilment of that operation. I think that I can be of some assistance there.

The hon. Member for Scarborough and Whitby (Mr. Michael Shaw) asked about the repayment of a bank overdraft by fixed instalments. Was it not unfair, he asked, that in the case of a bank overdraft which had been created before the date of the Budget, with repayment by instalments agreed, certain instalments should rank for relief and other instalments should not? I do not say this firmly without going into the question carefully with the hon. Gentleman, but I offer what I hope is the helpful advice that he should look into the matter to see whether the circumstances which he poses is that of a bank overdraft at that stage. If a bank overdraft ceases to be a running account and becomes a fixed account, the manager saying to the customer at a certain point, "You have had enough and from now on you must reduce by certain instalments", it ceases to be a bank overdraft and becomes a loan, which would attract relief. I think that that is right. It is different in nature and would continue to attract relief. I am glad that the hon. Gentleman raised the question. I hope that he will give it further thought. It may well be that there is no problem there.

9.30 p.m.

The hon. Member for Cities of London and Westminster (Mr. John Smith) made a long and amusing speech. As he is apparently not present, I shall not delay the House by replying to it. Indeed, I might be considerably out of order if I replied to any part of it.

I now come to the questions put to me by the hon. Members for Wanstead and Woodford (Mr. Patrick Jenkin) and Worthing (Mr. Higgins). The hon. Member for Wanstead and Woodford put to me the case of a combined account, and asked me to assume that such an animal existed. Fairly full inquiries have been made, including inquiries of the appropriate group of bankers, and we are unaware of this arrangement. But if, unfortunately, it exists, what he is describing is a current account of a particular, odd variety. It is working as a current account on an overdraft, but from time to time the customer pays in a certain amount by way of an instalment. But what he describes is a running account, and therefore the amount overdrawn will vary from day to day, but over a period it will reduce. In short, the graph of the overdraft will be a wiggly line tending to come downwards—a wiggly, not a fixed line, and not coming down in clear steps. The hon. Gentleman has described to me a current account, which therefore would not rank.

Mr. Patrick Jenkin

I think that the account I was describing would come down in wiggly steps. That is, each step would wiggle, but there would be a per- fectly clear reduction, on the case put to me of £1,000 being paid in once a year to reduce the overdraft, and then there would be the fluctuating account at that level.

Mr. Diamond

Once a year? That is clearly an ordinary current account into which the customer pays £1,000 once a year, but for the rest of the time payments in may vary from nothing to a million pounds and the payments out may similarly vary. It is very difficult to deal with the position with precision, because it is unknown to us, although we have made considerable inquiries as to its existence.

The hon. Member for Worthing asked whether an account would still be a fixed account of the kind that would rank if the instalments were not regular but were reducing instalments. Indeed, it would. What he described is not a current account but an account in which there is a fixed arrangement. The way in which the commitment to reduce the account may be carried out may be altered from time to time, but that does not alter the nature of the account. In my view, what he described is a perfectly normal loan account, the interest on which would rank within the limitation I have described.

Mr. Higgins

I find it difficult to reconcile that with the wording of the Clause, which says: … the payment fell due and its amount were fixed … I should have thought that the amount varied.

Mr. Diamond

No. The amount of the repayment may vary, but that does not alter the fact that the loan is one that is distinguished from a current account, and therefore is the one on which interest ranks. Any account could be paid off at any time. There may be penalties attached to paying off any amount at any time, but there is nothing to stop a borrower paying off at any time any amount he wants to pay off. The creditor cannot refuse it.

It would not alter the nature of it if he wanted to pay it off in that way. It is not a current account which is being used regularly and which is being overdrawn. It is the current account on which interest ceases to be allowable after the end of June. It is right to treat it in this way. The hon. Member for Scarborough and Whitby thought that we were being a little harsh in bringing that to an end at the end of June, but I do not think so. There is nothing like the same commitment where we are dealing with an overdraft. Many overdrafts have, I am glad to say, been appropriately dealt with at the end of June, and it would be unwise to reconsider that situation especially as we are being, I hope the House will agree, so helpful with regard to loans generally.

The hon. Member for Worthing asked whether we were prepared to extend the period until 1995, and he made it clear that he would not be astonished if we were, regrettably, not prepared to do so. This would really be tantamount to carrying on the qualified interest virtually for ever. It would be impossible to have two systems running side by side, on one of which interest was allowed but which was disallowed on the other. We are meeting the point of hardship by dealing with the period up to 1975.

I see that the hon. Member for Cities of London and Westminister is back in his seat, so perhaps I may turn to his speech and in particular that part of it which interested me enormously when he drew attention to an alleged anomaly arising out of him borrowing money to buy a Canaletto and his investment company borrowing money to buy a Canaletto. I was not at all sure that there was any anomaly from the way that he described it.

It seemed that if this investment company was, as he described it, his investment company it would be a close corporation. Secondly, it seemed that if the purpose of the transaction was as he described it, to acquire a Canaletto to hang in his home, then in either case this was not a business transaction which attracted interest. If it was a personal borrowing there is no inconsistency. If he is putting to me the argument that it is right and necessary that those who wish to buy a Canaletto through a loan should have interest relief on exclusively personal borrowing, I can only say that this is one of the few occasions where he and I differ fairly profoundly.

Mr. John Smith

I was only illustrating one of the very many illogical aspects of this legislation by remarking that as an example a company may buy, as a piece of furniture, a valuable picture to put in the office of its chairman and get interest allowed for tax purposes, which I think is a bad thing. On the other hand, an individual cannot buy such a picture to hang in his own home and get relief on the interest, which I think is an equally bad thing.

Mr. Diamond

We have expressed our respective points of view. The hon. Member for Crosby (Mr. Graham Page) asked me a question which as far as I can see was, as he was good enough to put it, an unnecessary question. He asked me, if a company borrows for business purposes, do certain other circumstances affect the issue? They do not. If a company borrows for business purposes that is the end of the matter. I hope that in those circumstances this new Clause will be approved. I am sorry that I cannot recommend acceptance of the Amendments.

Question put and agreed to.

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

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