§ (1) In section 122(1)(b) of the Taxes Act for the words 'annuity or other annual payment (not being interest)' there shall be substituted 1196 the words 'annual interest or any annuity or other annual payment'.
§ (2) Where a person pays in any year of assessment interest on an advance from a bank he may claim that the amount of the interest shall be deducted from or set off against his income for that year of assessment.—[Mr. William Clark.]
§ Brought up, and read the First time.
§ Mr. Speaker
With this I am prepared to allow discussion on New Clause 45–(Interest on bank overdrafts)—and new Clause 47–(Loans for maintenance and repair of let agricultural property).
§ Mr. Clark
This matter was fully aired in 1969 and my right hon. Friend the Chancellor of the Exchequer, my hon. Friend the Financial Secretary and my hon. Friend the Minister of State will remember it very clearly, for both the Financial Secretary and the Minister of State took part in the debate, as did the late Iain Macleod.
The point is to allow bank interest as a deduction from one's income for tax purposes. Until the abolition of bank interest as an allowable deduction, in 1969, we had always charged tax under our tax laws on net income. Any expenditure incurred in obtaining that income had been allowed. The late Iain Macleod summarised this cogently and succinctly when he said that it should be necessary for the Treasury to allowinterest on borrowings for all normal personal, family, professional and business purposes; and, accordingly, when we form a Government we shall repeal these Clauses."—[Official Report, 18th July, 1969; Vol. 787, c. 1163.]It is as well to remind the House of this because it was a definite promise by a distinguished Conservative Member who, for a short time, became Chancellor. It was a clear promise and I am sure that my right hon. Friend the Chancellor is fully seized of the point.
I do not want to repeat the argument and delay the House, but in many cases the taxpayer has to borrow money from a bank to satisfy his tax liability, that is, his estate duty liability. I remind my right hon. Friend that in winding up an estate, the estate duty is computed and it must be paid before the executor can handle the assets and realise them in 1197 order to pay the duty. Consequently, a bank overdraft is always organised. Many of my hon. Friends could give other examples whereby a legitimate bank interest should be an allowable deduction.
The previous Government took a regressive step when they abolished this allowance for tax purposes. It is ludicrous to say that everybody who has a bank overdraft is of necessity a speculator running in and out of the stock market, earning a lot of money and charging the interest on his overdraft. This does not happen. In many cases bank interest is necessarily incurred in the obtaining of income.
There are many complications in this legislation. There are loopholes in the charging of bank interest. My right hon. Friend will be seized of these points. None of us on this side of the House would advocate any change in the tax law that would lead to tax evasion. But in cutting out the whole of bank interest, one is penalising the true borrower, the man who borrows money to augment his income, in which he eventually pays income tax.
When the previous Government introduced this regressive measure, the present Treasury Bench opposed it. In view of the commitment made, I hope that my right hon. Friend can deal with the Clause sympathetically. Although I accept that there are complications, and that between now and tomorrow, when we finish the Bill, it may be a little difficult to accept the Clauses, I hope that my right hon. Friend will give a firm and unequivocal undertaking that this matter will be looked at urgently, so that the taxpayer is not penalised as he has been since 1969.
§ Mr. Hordern
I reinforce the cogent argument of my hon. Friend the Member for Surrey, East (Mr. William Clark). I shall not set out, as he has very eloquently done, the reasons for my doing so, because the merits have been so fully argued in previous Finance Bills, notably in the Bill of 1969. In that year the Clauses introduced by the then Government were discussed upstairs in Standing Committee, and the Conservative Opposition at that time discussed the new Clauses and our Amendments to them for one whole morning, a whole afternoon, an evening and a whole night session. Therefore, I say no more on the merits of the matter, 1198 except to remind my right hon. Friend, who will need no reminding, of the principle of the relief that we seek to gain, that is, that the charge to tax should be on net income after allowing expenses necessary to obtain it. That is the principle and that is what we fought for so strongly when in Opposition.
My hon. Friend the Member for Surrey, East mentioned the words of the late Iain Macleod on 18th July, 1969:We believe that relief should be available, as in the past, for interest on borrowings for all normal personal, family, professional and business purposes; and, accordingly, when we form a Government we shall repeal these Clauses,"—[OFFICIAL REPORT, 18th July, 1969: Vol. 787, c. 1163.]In our election manifesto we alluded to this repeal, as my right hon. Friend knows very well. I know that during the course of this Parliament that pledge will be carried out, and I fully support my hon. Friend on the Clause.
§ Mr. John Farr (Harborough)
I reinforce the remarks of my hon. Friends. I, too, am confident that something will be done in this respect fairly soon.
In my new Clause on the Order Paper I have tried to draw attention to the difficulties of those who own or operate agricultural assets consisting of one, two or three farms, or even more, when they cannot set against income the interest which is charged on their relevant bank account. The result of this has been that in some cases many agricultural companies, especially the smaller ones, have had to cease letting farms to prospective tenants because they have found that if they take the farm in hand themselves and farm it, they can have overdraft interest allowed for tax purposes on the necessary expenditure incurred in running the farm.
That has had one regrettable effect in that it has, in a way, made it much more difficult for small farms and people who would like to become tenants to obtain a farm, because there are fewer and fewer coming on the market. When faced with the prospect of letting a farm and knowing that the expenses of running the business cannot be offset against tax, for the purposes that I have outlined in my new Clause, many landlords are either taking the farm in hand themselves or are, in some cases, selling it to an owner-occupier. This has hit hard the small would-be farmer with limited means because 1199 he cannot afford to pay the high price of agricultural land today, about £300 or more per acre for some of the best land in the Midlands.
My hon. Friend the Member for Torrington (Mr. Peter Mills) and I tabled the Clause in the hope of calling the Chancellor's attention to this important point and highlighting the difficult position in which estate companies which operate farms are placed by not being allowed to offset their overdraft interest for tax purposes.
§ Mr. du Cann
I welcome the opportunity, like my hon. Friend the Member for Harborough (Mr. Farr), who spoke so well, to deal with the narrower aspect of this matter, but I strongly support what my hon. Friend the Member for Surrey, East (Mr. William Clark) and my hon. Friend the Member for Horsham (Mr. Hordern) have said regarding the general case.
All of us know how very difficult a Chancellor's choice is at any time. He is faced with an almost bewildering variety of alternatives. However much he may wish to please his friends and to honour promptly clear undertakings which have been given, it is difficult to please everyone when one has to have in mind at the same time the wise managament of our economy. We all greatly appreciate the presence of my right hon. Friend the Chancellor to reply to the debate. I hope that he will not mind my saying that inevitably there was some disappointment that he did not find himself able to act in regard to interest in his Budget this year. We all hope that, above all else, if he cannot accept the Clause, he will give a very plain undertaking and a timetable, perhaps, for next year.
I return to my narrower point. It is a matter about which I and other hon. Members feel very keenly. My right hon. Friend knows that I have written to him on this subject. I thought it better that he should have a view in advance of Report stage, which is why that letter was not signed by a large number of my hon. and right hon. Friends.
The loan interest provisions of the Finance Act, 1969 entirely disregard the agricultural situation. They are, as my 1200 hon. Friend the Member for Harborough instanced, proving serious for owners of let land and can have only a damaging effect upon food production. My hon. Friend was right to underline the problems which exist in respect of young farmers attempting to obtain occupation of farms which are available for rent. The reason is that those who might wish to let their land are, for one reason or another—the disallowance of loan interest is one important reason—not willing to put farms upon the market. They are discouraged in almost every way from so doing by legislation of one kind or another.
My purpose in tabling new Clause 47 was to give my right hon. Friend an opportunity, if he thought fit to take advantage of it, to recognise that the agricultural situation is a special one. Even if my right hon. Friend were not able to go all the way with my hon. Friends the Members for Surrey, East and Horsham, none the less he might think it right to harmonise the general tax code with the special situation of those who own agricultural land. Those who are considering letting land or who are letting land at present regard this as a matter of some importance.
I do not think that the difficulties should be allowed to continue pending the promised repeal of the whole of the 1969 provision. It is profoundly unsatisfactory that if a farm is owner-occupied tax relief can be obtained on the interest on a loan applied to replacements, whereas if the farm is tenanted the owner is denied relief unless he is a company. That is neither fair nor sensible. It is a capricious distinction and should, in the interests of good sense, be removed promptly. I hope that my right hon. Friend will be able to give us some encouragement tonight.
§ Mr. Barber
I am grateful to my hon. Friend the Member for Horsham (Mr. Hordern) for tabling the Clause and to my hon. Friend the Member for Surrey, East (Mr. William Clark) for the way in which he moved it. The speeches of my hon. Friends the Members for Horsham, for Surrey, East and for Harborough (Mr. Farr) and of my right hon. Friend the Member for Taunton (Mr. du Cann) were commendably brief, but they were none the less cogent for that. I take the point absolutely; my hon. 1201 Friends are right in saying that this subject has been discussed in great depth before now. I am pleased that the Clause has been tabled, because it gives me an opportunity to explain to the House the Government's intentions.
Before dealing with the general aspect, may I say that I am not at all sure, for reasons which I could deploy at some length, that new Clause 45 has merit. However, it is a matter which I will obviously take into account.
I have great sympathy with what my right hon. Friend the Member for Taunton said about agricultural landowners. I agree with my right hon. Friend that it is wrong that they should not be able to claim relief for interest on money borrowed for the maintenance of let property. My right hon. Friend will appreciate the difficulties of legislating piecemeal for particular cases in advance of general legislation. I am grateful to my hon. Friend for having written to me some time ago and putting the point to me, because it enabled me to give the matter full consideration which sometimes one is not able to have in connection with Finance Bill debates.
For the reasons which were explained at the time, we opposed the provisions in the Finance Act, 1969 which provided for the disallowance of interest payments. Both then and in our election manifesto we said that we would legislate to put this matter right.
The House will recall that we did not commit ourselves to legislate in the first, or indeed in any particular, Finance Bill. We have repeatedly made it clear, and we said it in our manifesto, that our programme was a programme for a Parliament. I mention this because this commitment was different from, for instance, the commitment to deal with the disaggregation of children's investment income. There we said specifically that we would make the change in the first Budget; and this I have done.
The whole House will understand why, with so many other taxation changes announced in the Budget, it was simply not possible as well to deal with the disallowance of interest.
It was not just a question of my taking action. I also had to take into account the very considerable burden of work which faces the Inland Revenue; and 1202 I cannot help recalling, as many of my hon. Friends will, the problems which arose after the Finance Act, 1965 when the Revenue was placed in an almost impossible situation.
I want now to explain to the House certain problems which have to be resolved. Since our intention was stated in 1969, an entirely new situation has been created by the Crowther Report, which has recommended that all consumer credit transactions, whatever form they take, should be recognised by law as involving a loan to the purchaser at interest. This, as I shall show, is a recommendation of not only immense importance, but also of great significance for the taxation system. The Crowther Report when on to urge, in referring to the possible restoration of tax relief for interest, that, whatever was done, all consumer credit transactions should be treated alike.
It is also important to bear in mind that the Crowther Report made it clear that the Committee appreciated that practical considerations might rule out universal relief for all consumer credit interest.
Whatever view may be held about the merits of the Crowther recommendations, on which the Government have not yet taken any decisions, the simple fact is that there are estimated to be 4 million or 5 million hire purchase transactions a year and these have never attracted tax relief. If we were now to adopt the Crowther recommendations and treat all consumer credit transactions alike, this would involve in total giving relief in 5 million or 6 million cases.
To do this would mean, in terms of work load, the equivalent of more than 1,000 Inland Revenue staff working full-time to handle the claims. Right hon. and hon. Members on both sides will agree that this is just not practicable at this time and it was certainly never contemplated in 1969 that relief for interest should be allowed for instance for the millions of hire purchase transactions. The Revenue is already over-burdened. Although I have deliberately staggered the introduction of the major reforms which I announced in the Budget, those reforms are bound initially to add to the work load, although eventually they will certainly save it very considerably
1203 In the next financial year—1972–73–for instance, tax offices face the massive task of re-coding every P.A.Y.E. taxpayer in preparation for the new unified tax to come into effect in April, 1973.
In the light of what I have said, the House will appreciate that, with the best will in the world, it was not practicable to act at this time. The recommendations of Crowther are themselves of great consequence, quite apart from the fiscal aspects of the proposals.
I must therefore ask the House to accept that it is not yet possible to state what is the most equitable and practicable scheme for dealing with the situation which has been highlighted by Crowther. I should make the further point that I am advised that, although the new Clause is in order—obviously, it is, since it would not have been selected otherwise—it would not serve as a workable provision if it were written into the law.
I hope that, in the light of what I have said, my hon. Friend will not wish to press the new Clause.
§ Mr. Dick Taverne (Lincoln)
I have some observations to make on new Clause No. 48, moved by the hon. Member for Surrey East (Mr. William Clark), though they will be short, as, clearly, this will be the subject of major debate on a future occasion.
As the new Clause stands, it would be totally unacceptable to the Opposition. It might be argued that it would, in itself, by encouraging personal borrowing, have a reflationary effect. There was always considerable argument about the economic impact of the 1969 measures. Viewed simply in terms of the amount of tax added to the revenue, the deflationary effect which was required at the time to act against consumption was somewhat limited, but it was always thought likely that it would have a considerable extra effect on personal borrowings, and some people in the City to whom I have spoken certainly thought that it played a considerable part in the decline of Stock Exchange values after the 1969 Budget. If that was right, to encourage personal borrowing again in this way would in itself have a reflationary effect, but we should firmly hold that it would be a reflation of the wrong kind for the benefit of the wrong people.
1204 I thought that the hon. Member for Surrey East, in presenting his new Clause to the House—the other new Clauses are directed more particularly to other circumstances—approached the subject somewhat superficially. We have now had the Crowther Report which, as the Chancellor said, is closely relevant. It seems to me that the Crowther Report will put considerable obstacles in the way of the Government's simple redemption of the pledge they made in 1969. If there is no extension to hire-purchase interest, it will be monstrously inequitable, as the previous position was. It was always true that this was a tax concession favouring only one section of the community. It favoured those who could borrow by means of bank advances but did nothing to relieve the position of the ordinary man who borrowed by means of hire purchase.
As Crowther rightly pointed out, there is no inherent distinction between the two, save that one group are wealthier than the others. If there were a reform carried out simply in the terms of the pledge which was given, it would be one more example of reform favouring just one section of the community, like the disaggregation provisions to which the Chancellor referred.
What is to happen now? As the Chancellor said, if this tax relief is to be given not only to those who borrow by bank advances but to those who borrow under hire-purchase arrangements, not only will there be a lot of work for the Revenue but there will be a great deal more cost to the Exchequer, and the economic effects will be much greater, I think, than anything contemplated in the past. It would be intolerable if one did not treat all borrowings alike, and, when the Crowther Report comes to be considered, its impact on whatever reform the Chancellor has in mind will be most important.
I beg the Chancellor not to repeat on that occasion the mistakes made in this Budget. The need for one nation, which the Prime Minister expressed when he took office, will be as great in the years to come as it is now, and divisive policies favouring one section of the community alone—the theme of the present Budget—will be as disastrous then as they are proving now. There will need to be a change of course in economic and social 1205 strategy by the Government after this Budget period.
§ The question of what is done about personal loans and overdrafts will be material because, if a tax concession is given to the man who can borrow tens of thousands in order to invest and nothing is done for the person who borrows in order to buy a washing machine, a refrigerator or a motor car, the effect will again be divisive. It will work against the one nation concept which is the country's need now, and it will not be the sort of measure which will help to improve our economic situation.
§ Mr. du Cann
I appreciate that the hon. and learned Gentleman feels obliged to make certain points in the context of Crowther, and I appreciate that he has strong views about the management of the economy in general, but does he not understand that the case which my hon. Friend the Member for Harborough (Mr. Farr) and I advanced in our different ways in regard to the maintenance of agricultural property is totally different from the general matters with which he is dealing?
§ Mr. Taverne
I have always recognised that there was a special difficulty in that respect, and I said in my opening sentence that I should address myself specifically to new Clause No. 48 in the name of the hon. Member for Surrey, East and his hon. Friends. I addressed myself primarily to the reforms adumbrated in that Clause.
§ 7.45 p.m.
§ Mr. William Clark
The House is grateful to my right hon. Friend the Chancellor of the Exchequer for coming to listen and to answer this short but important debate. We all realise the complications, particularly with the advent of the Crowther Report, though I endorse what my right hon. Friend the Member for Taunton (Mr. Du Cann) said, that Crowther really has nothing to do with the taxation of interest in agriculture.
We on this side realise that it was a package promise regarding interest which was made in 1969, and repeated last year. In view of what my right hon. Friend has said, I beg to ask leave to withdraw the new Clause.
§ Motion and Clause, by leave, withdrawn.