DISALLOWANCE OF INTEREST

HC Deb 17 July 1969 vol 787 cc898-912

Mr. Speaker

We now come to Amendment No. 301. I again remind the House that despite all the efforts that we have made during the small hours of the morning we still have a mass of work to do and that brief speeches and debates will be not unacceptable to the whole House.

The Minister of State, Treasury (Mr. Dick Taverne)

I beg to move Amendment No. 301, in page 106, line 6, leave out paragraph 1 and insert:

Overdrafts

1.—(1) This paragraph has effect for the purposes of the sections of this Act giving relief in respect of interest, and paragraph 8 of this Schedule.

(2) If a person draws money from a bank account or other running account, and applies it, or any part of it, so as to fulfil the conditions in any of the said sections or the said paragraph 8, he shall be regarded as obtaining a loan of that money up to the amount of the highest debit balance in the account in the six months beginning with the date on which the money is drawn:

Provided that if that date fell before 6th April 1968 it shall be assumed that the said highest debit balance was not less than the amount of money drawn from the account.

(3) If the account has been in credit throughout a year of assessment (excluding any year before the year 1968–69) any loan so obtained before the year in which the account has been in credit shall be treated as having been repaid at the beginning of that year.

(4) The whole of the interest on debit balances in the account in any year of assessment shall be available for attribution to any outstanding loans so obtained:

Provided that the amount of interest attributable to a loan, or to the aggregate of any loans, made before the beginning of the year 1968–69 shall not exceed the amount of interest on debit balances in the account in the year 1968–69 with which the said person has been charged.

(5) A loan so obtained shall be regarded as carrying interest in any year of assessment at the rate chargeable on the account on the last day of that year on which the account was in debit, but only so far as interest is available for attribution under sub-paragraph (4) above and, where part only of a loan is eligible for relief under the provisions mentioned in subparagraph (1) above, that interest is to be attributed rateably to the eligible and ineligible parts of the loan.

(6) Where the amount of interest paid on a loan for part only of a year of assessment is to be ascertained, this paragraph shall be applied to ascertain the amount of interest paid for the whole of the year, and that amount shall be apportioned between that part of the year and the remainder according to their respective lengths.

This Amendment, in the first place, removes the commencement provisions in paragraph 1 of Schedule 13 which are now contained in new Clause 29 and mainly deal with the question of tax relief on overdraft facilities where needed to meet qualifying expenditure. This is a difficult problem. The previous Amendment did not deal with it and was severely criticised by the hon. Member for Worthing (Mr. Higgins) and the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin).

Their criticisms seemed to have considerable force. Previously, if an overdraft did not exceed a certain sum in a month that was taken as the amount of the account, but it was said that there could be a fortuitous payment through the account at a certain time which would mean that this provision would work unfairly in certain cases.

The Amendment meets this difficulty and has been brought forward after further discussions with the Committee of London Clearing Banks on the proposed following rules. First, where a person draws on a bank account or other running account to meet qualifying expenditure, he is to be treated as obtaining a loan equal to the money drawn or the highest figure of the overdraft in the six months after the money is drawn, whichever is the less. The money is drawn when it is debited to the account—that is, not when the cheque is made out but when the recipient cashes it. That is the date when the bank parts with the money and also the date which is recorded in its books.

It may, for the reasons I have given, be onerous to take the state of the account at the date when the money is drawn, when the account may be in credit owing to money paid in on a temporary basis. Instead of that, the figure taken is to be the highest figure of any overdraft in the following six months or the amount of the cheque, whichever is the less. Where the proceeds of the cheque have been only partly used for qualifying purposes the interest will be apportioned rateably between the qualifying and non-qualifying parts of the loan.

Secondly, relief is to be given for any year of assessment, first, for interest on the amount of the notional qualifying loan at the rate of interest charged at the last day of the year for which the account was overdrawn or, alternatively and secondly, the actual overdraft interest paid in the year, again whichever is less.

Thirdly, if the account has been in credit for a whole tax year the loan is to be treated as having been repaid at the beginning of that year.

These rules have to be modified for money drawn in the past, because there may no longer be records showing the state of the account in the six months following the time when the money was drawn and they may not show when the account was subsequently in credit for a whole tax year. Therefore, in the case of money drawn before the year 1968–69 relief is limited to the interest charged on the overdraft in the year 1968–69, which will already be recorded in the tax payer's claim to relief for overdraft interest for that year. If no overdraft interest was charged for 1968–69 the loan will be treated as having been repaid and no relief will be due.

Where some overdraft interest was charged for 1968–69 relief will be given, subject to the 1968–69 ceiling, by reference to the amount drawn—or the amount of the qualifying expenditure, if less—without regard to the state of the account in the period before 1968–69.

I hope that these provisions will deal with the points previously made and will work fairly.

Mr. Terence L. Higgins (Worthing)

The Minister of State is too modest. It was the case that when a somewhat similar but more widely ranging Amendment came up in Committee the Government found themselves defeated as a result of the Chairman's casting vote. On that occasion there were three essential points put forward by the Government in an Amendment designed to tighten the provisions of Clause 18, 19 and Schedule 13 even more. The three main aims on that occasion were, first of all, to stop artificial transactions for loans on houses, such as transactions of the kind where the man might sell the house to his wife and then buy it back again, thereby increasing the total amount of his mortgage and obtaining loan interest upon it.

That part of the Government's Amendment came up again last night on Amendment No. 218 and we raised no objection on that occasion. Although we disagreed with the fundamental principle of the whole proposal the Government are putting forward for the change of the law about the interest, we could see that this was a clear kind of contrivance which would operate against what they proposed.

The second main issue in the Government's ill-fated Amendment which was defeated in Committee concerned the device whereby the Government apparently tried to decide, through the Inland Revenue, whether people who changed houses with someone else in the same road were or were not motivated by the idea of getting a greater loan and, therefore, greater tax relief. The Minister is too modest. As I understand, this point has been dropped.

Mr. Taverne

This was dealt with last night. It was a modified version of the previous Amendment, but the point was dealt with.

Mr. Higgins

The point which is now in this very reduced Amendment represents some changes in the Government's position and a move towards a sane attitude, within the limits of their own provisions. The original provisions were clearly unfair. They meant that the amount of interest allowed would turn almost entirely upon the purely arbitrary fluctuations in a particular overdraft. This was nonsense. It is extraordinary that any Government should have come forward with an Amendment to their own Bill which, quite clearly, was badly thought-out. None the less, we accept the repentance of the Government and the Minister of State and accept that the object of the Amendment is to meet the points made in Committee. This at least is some improvement in the Bill. It is still objectionable in many respects, but it is a move in the right direction.

It still leaves completely unanswered the basic absurdity of these provisions about house purchase which is that if someone sells his house and then buys it back he is completely caught, even now, by the provisions of the Bill. On the other hand, suppose he sells his house and buys a different one for perhaps a higher figure. Whereas the mortgage on his old house was almost paid off and perhaps stood at 20 per cent., the mortgage on the new house s 100 per cent. In this case, he gets complete relief on the interest on that loan. The Government are in this strange position, which I described as ludicrous in Committee, where they have these elaborate Clauses designed to catch what are called artificial transactions, while anyone who engages in what the Government feel is a genuine transaction gets total relief.

The Amendment does nothing to meet that fundamental point, and it is one on which we disagree with the Government in their proposals about the disallowance of interest. It would be churlish for us to press for even more, in the spirit of Oliver Twist, because the Government have cleared up the more obvious absurdities within the very narrow range of this point.

4.15 p.m.

Mr. Michael Shaw (Scarborough and Whitby)

I want to comment on the uncertainty that has resulted in the original Schedule and change that has now taken place. During the last few months people have been very worried about their position. It has not been, until now that we have been able to give any clear indication to them.

Inquiries have gone on with banks and accountants, there has been a reviewing of bank accounts, trying to break them down, and so on, and it has all been unnecessary.

Now that the consultation has taken place the matter has been cleared up, and although we do not like the principle, these uncertainties are resolved and the matter has been put into a very sensible pattern for which we are grateful. However, we must evolve a system whereby the commonsense Schedule that has now been produced could have been brought forward earlier, saving all this uncertainty.

Mr. John Smith (Cities of London and Westminster)

This Amendment illustrates very well the extraordinary complexities with which the whole community will be entangled simply for the sake of allowing the Government to pursue a few imaginary malefactors. I ask the House to compare the previous system with the proposed rigmarole. Until now the bank simply typed out, half yearly, on a small form, the amount of overdraft interest charged to its client who sent it to the revenue. It was entered on his tax return and that was the end of the matter. Now we are substituting for this system an extremely complicated procedure involving all sorts of apportionments and rateable attributions.

Secondly, I cannot understand why, when calculating the allowable interest it is necessary to allow either the interest actually incurred or an amount based—since lending rates are based on the Bank Rate—on the Bank Rate at the end of the year. In the frequent case where Bank Rate is lower at the end of the year than the average of Bank Rate throughout the year, this will result in a needless deprivation of allowance to the taxpayer.

Mr. Taverne

The reason we had to take the rates at the end of the year is to some extent arbitrary, but it is the only rate that we can fix.

Amendment agreed to.

Mr. Taverne

I beg to move Amendment No. 221, in page 107, line 13, leave out paragraphs 3 and 4.

This Amendment is consequential on new Clause 28, since part of paragraph 3 referring to overdrafts is now to be found in the Clause.

Amendment agreed to.

Mr. Taverne

I beg to move Amendment No. 222, in page 108, line 6, leave out ' and (12)'.

This, again, omits a reference which is being replaced by one in new Clause 29.

Amendment agreed to.

Mr. Taverne

I beg to move Amendment No. 231, in line 26, at end insert:

Allowance of interest as a business expense

6.—(1) Section 137(f) of the Income Tax Act 1952 (disallowance of deductions in respect of capital employed) shall not be treated as disallowing the deduction of any interest.

(2) After paragraph (1) of the said section 137 insert— (ll) any annual or other interest paid to a person not resident in the United Kingdom if and so far as it is interest at more than a reasonable commercial rate '.

(3) This paragraph 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. Speaker

I would suggest that with this Amendment we can take Amendments No. 33 in page 20, line 17, at end insert— ' and interest paid wholly and exclusively for the purposes of a trade, profession or vocation shall be deducted in computing the amount of the profits to be charged under Case I or Case II of Schedule D'. and No. 35, in page 21, line 15, at end insert: (7) Section 137(f) of the Income Tax Act 1952 (disallowance as business expenses of capital) shall be taken not to extend to reasonable interest paid for the use of capital.

Mr. Taverne

In Committee, fears were expressed that as a result of the European Investment Trust case, despite the actual practice of the Inland Revenue, Section 137(f) of the 1952 Act could lead to the disallowance of the deduction of interest on capital employed in the business. My right hon. Friend the Chief Secretary said that he would consider whether he could allay these fears by making explicit statutory provision and that is what this Amendment does. It covers very much the same points covered in Amendments 33 and 35. Subparagraph (1) provides that Section 137(f) is not to be treated as disallowing the deduction of any interest as a business expense. Sub-paragraph (2) provides for the disallowance of any interest, whether annual or short, paid to a non-resident at more than a reasonable commercial rate. The disallowance will apply only to the excess. Sub-paragraph (2) substitutes a consistent rule for the decision which gave rise to the fears that the European Investment Trust decision applied only to interest which could be brought within Section 137(f).

Sir John Foster (Northwich)

I think that we can justly claim that as a valuable contribution by the Opposition, because the position before it was brought to the attention of the politicians in charge was that Section 137(f) had been interpreted so that one could not deduct interest even on working capital. The result was that if I.C.I. built a factory and borrowed the money to build it it was not allowed to deduct interest as a business expense.

There are many cases in the Income Tax Acts where one gets these ridiculous results, and the Inland Revenue is forced to deal with them by extrastatutory concessions or by hole-in-the-corner methods. Under the hole-in-the-corner method, if it is allowed, the person concerned is regarded as a naughty boy. This is very unsatisfactory, because sometimes the person is not a naughty boy in the estimation of anybody else. If it is hole-in-the-corner, it is said that one cannot deduct interest on working capital.

I wish that a Government would end extrastatutory concessions. They are a disgrace to all Governments, and to any rational system of income tax. Here, at least, we have cleared up one anomaly.

Amendment agreed to.

Further Amendments made: No. 223, in page 109, line 23, leave out ' paragraph 3 above ' and insert: section ("loans made on or before 15th April 1969") of this Act'. No. 232, in page 110, line 2, leave out time when' and insert: ' end of the year of assessment in which '.—[Mr. Taverne.]

Mr. Taverne

I beg to move Amend-merit No. 230, in page 112, line 32, at end insert: (4) If under the transaction a person assigns, surrenders or otherwise agrees to waive or forgo income arising from any property (without a sale or transfer of the property) then, without prejudice to the liability of any other person, he shall be chargcatble to tax under Case VI of Schedule D on a sum equal to the amount of income assigned surrendered, waived or foregone. (5) If credit is given for the purchase price of any property, and the rights attaching to the property are such that, during the substances of the debt, the purchaser's rights to income from the property are suspended or restricted, he shall be treated for the purposes of subparagraph (4) above as if he had surrendered a right to income of an amount equivalent to the income which he has in effect forgone by obtaining the credit. (6) The amount of any income payable subject to deduction of income tax at the standard rate shall be taken for the purposes of subparagraph (4) above as the amount before deduction of that tax. Paragraph 13, which is extended by this Amendment, deals with artificial arrangements for dressing up payments of interest in another form. The Schedule as it stands applies to loans free of interest when the debtor agrees to make annual payments instead, and, second, to loans free of interest, but where the debtor transfers an income-producing asset.

The Amendment deals with two similar devices, both of which have been used in cases which have recently come to the notice of the Inland Revenue. In the first case, a company puts trustees in funds to advance money to its employees to buy shares in the company, and it is then made a condition of the advance that until the employee has repaid the advance he is not to be entitled to the dividends, but must pass them on to the trustees.

The other device is similar, except that instead of selling his right to the dividends on his shares the employee waives his right to the dividends so that the company keeps the money instead of paying it out as dividend. The Amendment is in line with the existing provisions of paragraph 13, and it tightens the position insofar as those two devices have come to light.

Amendment agreed to.

Mr. Taverne

I beg to move Amendment No. 224, in page 113, line 6, at end insert: (3) This paragraph shall not impose any obligation on a bank carrying on a bona fide business in the United Kingdom in respect of any interest paid by the bank in the ordinary course of that business. This is an Amendment to paragraph 14 which empowers inspectors of taxes to require persons who pay interest without deduction of tax to report the names and addresses of the payers and the amount paid to them. The Amendment exempts banks from the duty of making reports under this provision in respect of interest on their deposit accounts, and so on, because Section 29 of the 1952 Income Tax Act already makes such provision.

Sir J. Foster

My recollection is that there is a provision in Section 29 which says that if a person serves notice on a bank that he is a foreign depositor the bank is obligated not to disclose his name. I imagine that that proviso is not touched by the Amendment.

Mr. Taverne

I cannot tell the hon. and learned Gentleman whether that provision is there. Perhaps he can confirm that in a moment. All that the Amendment does is to remove from banks an obligation which would otherwise be there. It leaves banks in the position in which they were previously under Section 29. The position of the banks is not changed.

Sir J. Foster

With the leave of the House—

Mr. Speaker

Order. It is not usual to have the leave of the House in these circumstances. I think, however, that the hon. and learned Gentleman might intervene before the Minister sits down.

Sir J. Foster

Thank you, Mr. Speaker. If Section 29 stands, then the proviso is in subsection (5).

Amendment agreed to.

Further Amendment made: No. 225, in page 113, line 10, leave out ' section 19 of this Act' and insert: 'the sections of this Act giving relief in respect of interest'.—[Mr. Taverne.]

Mr. Taverne

I beg to move Amendment No. 308, in page 113, line 18, at end insert: (2) If the claim relates to interest on an overdraft the statement shall show (instead of the particulars in paragraphs (a) to (d) above)—

1. (a) the date when the money was drawn out of the account and, unless that date fell before 6th April 1968, the highest 908 debit balance in the account in the six months beginning with that date,
2. (b) the rate of interest chargeable on the account for the last day of the year of assessment to which the claim relates on which the account was in debit,
3. (c) the amount of interest on debit balances in the account in the year of assessment, and
4. (d) the name and address of the claimant.

Perhaps it might be convenient to refer, at the same time, to Amendment No. 374, in line 21, which is part of the same Amendment. These are consequential Amendments, providing for the form of certificate which a person claiming relief for overdraft interest must get from the payer and furnish in support of his claim.

Mr. Higgins

I think that the Minister is wrong in saying that these Amendments are consequential. As I understand, this somewhat changes the obligation which at present falls on banks for the issuing of certificates of this kind. I think it true to say that there has been some concern among bank managers about what their obligations will be following the passing of Clauses 18, 19, and this Schedule.

Can the hon. and learned Gentleman confirm that it will not be necessary, under the new form, which I gather will replace the present form R.62, for ordinary bank managers to certify whether or not the interest which is covered by the certificate is allowable, nor will it be necessary to state the purpose for which the loan is to be used?

Second, can the Minister clear up what is meant by the statement with regard to the rate of interest? Does this mean that the true rate of interest must be stated? There are a number of different ways of computing interest, particularly on bank overdrafts in the form of loans, and so on, which may differ from the true rate of interest if that term is used in more general terms.

In that connection, what is the position if the rate of interest is somewhat offset by differences in charges, and so on? There is considerable concern about this in the banking community. Have they been consulted on this matter?

Mr. Taverne

I understand that they have been consulted on the second matter, and it was after discussions with the Committee of the London Clearing Banks that this decision about charging the rate of interest charged on the account for the last day of the year of assessment was fixed. It would be the rate of interest which the bank was charging on that day.

I can give the hon. Gentleman the assurance for which he asked in the first part of his comments. A bank, or any other creditor, will not be concerned with whether the interest ranks for tax relief, because that will depend on facts which are not within its knowledge. I said that these were consequential Amendments because they are consequential on the new form of paragraph 1.

Mr. Higgins

Can the Minister confirm that it is the true rate of interest which is stated, rather than any other basis, for example, that used by gas boards in advertising what the rate of interest is?

Mr. Taverne

I think that that is right, but I shall make sure, and if it is not I shall inform the hon. Gentleman. I understand that it is the true rate of interest.

Mr. Speaker

It would be better if the debates on Report were more formal, and the winder-up wound up at the end.

Mr. David Howell (Guildford)

Can the Minister say whether in his discussions with the London clearing banks any estimate was asked for, or offered, about additional administrative costs, if any, on the bank under the system arising from these Amendments?

4.30 p.m.

Mr. Kenneth Baker (Acton)

The Amendment was introduced rather diffidently by the Minister, but it makes a substantial change in the practice of the banks. The bank statement one sends at present to the Inland Revenue is a simple piece of paper stating the amount of interest paid. The new banker's certificate, on the other hand, will be a more elaborate document, and, in particular, under paragraph (2)(a) of Amendment No. 308, it will have to state '' the highest debit balance in the account in the six months beginning with that date. I regard that as highly objectionable. For the first time, an inspector of taxes will know the highest overdraft which someone has had during the six months prior to the claim. This is a new departure. I believe it to be the first time that a tax inspector will automatically, under our tax laws, know the level of one's personal overdraft.

Mr. Taverne

The question of administrative costs was not discussed, and I cannot give the hon. Member for Guildford (Mr. David Howell) the figure. Amendment No. 308 follows exactly the earlier Amendment to paragraph 1 of Schedule 13, which has already been approved by the House. It follows automatically that, if that is to be the basis on which interest relief is to be given, this information must be provided. Otherwise, it would be unworkable. I take it that, in approving the first, the House automatically approves the second.

I cannot say offhand what information was or was not provided in the past, but it does not seem to me that there is a great difference in the information required. It is true that the new certificate will be more elaborate, but there is no difference in principle between the information previously required in connection with interest on a fixed debt or interest payable on overdrafts and information about what the highest point of the overdraft was in the course of the six months.

Mr. John Smith

There is a major difference. The information which banks have to supply at present can all be prepared by a bank's computers. As there are so many certificates of this sort, that is an important point. On the other hand, extracting the highest debit balance on the account cannot be done by computer. A highly-paid individual has to go through each account and retain in his head the highest balance while he goes through every single entry in the year. It is a very tedious process.

Amendment agreed to.

Further Amendments made: No. 274, in page 113, line 21, leave out ' subparagraph (1) above ' and insert: ' the preceding provisions of this paragraph '. No. 226, in page 114, leave out lines 30 to 32 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.—[Mr. Taverne.]

Mr. Taverne

I beg to move Amendment No. 227, in page 114, line 39, leave out paragraph 21.

This, also, is a consequential Amendment.

Mr. Higgins

Consequential on what?

Mr. Taverne

I shall be glad to explain in each case if the hon. Gentleman wishes.

The Amendment removes paragraph 21 of the Schedule because that paragraph has been transferred to subsection (5) of new Clause No. 29.

Amendment agreed to.

Mr. Taverne

I beg to move Amendment No. 228, in page 115, line 4, leave out payable ' and insert— ' paid without deduction of tax '. This is a drafting Amendment to the definition of "bank, discount house or stock exchange" interest in paragraph 22 of the Schedule. That definition relates to interest paid to a bank and short interest paid to a discount house or stockbroker which has hitherto qualified for relief under Section 200 of the 1952 Act. In the case of annual interest paid to a bank, relief can be claimed under Section 200 provided that the payer has made the payment in full without exercising his right to deduct tax at source.

The Amendment makes clear that the definition applies only where the interest is paid in full so that it is the kind to which Section 200 has so far been applied.

Amendment agreed to.

Mr. Taverne

I beg to move Amendment No. 313, in page 115, line 15, at end insert— 'but so that a company shall not be regarded as the subsidiary of another company unless both are bodies corporate '. This Amendment is designed to facilitate consolidation. It deals with the question of subsidiaries because there might be technical difficulties in consolidation if in new Clause No. 33 and one or two other places in the Bill the reference in the interest provisions to one company being a subsidiary of another were not expressly confined to bodies corporate.

Mr. A. P. Costain (Folkestone and Hythe)

This seems to be extraordinary. How could there be a company which was not a body corporate? What has the Minister in mind to catch under this conglomeration of words?

Mr. Taverne

It might otherwise refer to an unincorporated association.

Amendment agreed to.

Further Amendment made: No. 229, in page 116, line 13, leave out from under ' to as ' in line 14, and insert— ' the sections of this Act giving relief in respect of interest (except section "loans to pay estate duty"))'.—[Mr Taverne.]