ADJUSTMENT OF CONTRACTS ON CHANGES IN TAX (Hansard, 12 July 1972)

§ Mr. Trew
I beg to move Amendment No. 202, in page 31, line 3, after 'supplied' insert: 'or where a contract for the letting of goods on hire is entered into and during the period of hire,'. The intention of this technical Amendment is to extend that scope of the Clause to include contracts for hiring. As drafted, the Clause appears to include only contracts for the supply of goods or services. The words which appear to cause difficulty for contracts for hiring are in line 2— before the goods…are supplied". In the case of a contract for hire the goods are supplied at the beginning of the hire period and where such contracts are in existence at 1st April, 1973, when VAT comes into being, or at any time 1751 when there is a change in the tax, it would seem that the hirer will not be able to invoke the Clause and thereby raise his hire charge to recover the increase in tax, because the goods will already have been supplied. If the Clause is read in conjunction with Clause 7, it could be that the difficulty is dealt with. For the benefit of those who will have to construe the Clause, my hon. Friend should make this clear.

§ Mr. Nott
My hon. Friend is concerned about whether the Clause covers hirings. Clause 5(2) states: Supply of goods includes…in particular, the letting of goods on hire… Clause 7 is relevant. If there is a tax change in the course of the hiring, some of the supplies will attract tax at the old rate and some at the new, and the Clause as it stands will operate on the supplies taking place after the change. If in any case there is only one supply for a hiring, it will occur either after or before the tax change, and the Clause as it stands will operate or not as the case may be.
Therefore, the Clause as we debated it in Committee will apply in the case of a contract entered into before the coming into operation of VAT. In the case of hiring where payments are made over a period, it might in certain circumstances be necessary to deal with the first payments which come into effect before a tax change in one way and payments which come into effect after a tax change in another.

§ Mr. Peter Rees (Dover)
I remain as unclear after that exposition as I was before. Let us suppose that a person enters into a contract of hire and that during the course of a contract there is a change in the rate of tax. This is on normal contractual principles. Unless there is an amendment in the sense to which my hon. Friend refers, the hirer will be unable to amend his contract charges. This is very simple, and I take the first point made by my hon. Friend that supply is defined in subsection (5) or (6) of Clause 7 as including a contract of hire.
What is not made clear is at what point during the contract of hire supply takes place. As I read the Bill, the supply must take place when the contract of hire 1752 is entered into and, say, the television set is made available to the person to whom it is hired. That is a situation which the Bill does not appear to cover.
Let us say that a contract of hire is entered into on 1st April, 1973 and the television set is delivered to one of my constituents. There we have the supply, because the contract of hire is deemed to include supply. Then let us suppose that on 7th April of that same year the Budget alters the rate of value added tax. It is not clear from my reading of the Bill that there is a fresh supply every week that the hirer pays hire charges, and therefore that the person who leases out the television set is entitled to amend the contract. I may be obtuse but, frankly, to me the point still remains obscure. I hope that my hon. Friend the Minister of State can clear it up.

§ Mr. Nott
This is a very complicated matter, and we debated it at some length in Standing Committee. Let us assume that in the instance of the television set two or three payments are made before the tax is raised. In that case, the payments will have been tax inclusive of the old rate of tax. However, if the rate of tax is then raised, Clause 42 then comes into effect and will apply to subsequent payments. The new tax rate will exist.
I think that my hon. and learned Friend the Member for Dover (Mr. Peter Rees) is confused because by regulations there will be a succession of supplies. Perhaps if I had said that at the beginning the position would have been made clearer more immediately. Regulations will define the matter as being a succession of supplies rather than a single supply.

§ Mr. Rees
I am most grateful to my hon. Friend the Minister of State. The point has now emerged that by regulations each, as it were, payment shall be regarded as marking a succession of supplies, and that would be entirely covered by the Clause. But I am sure that my hon. Friend will concede that in the Bill as drafted that point is not covered. I quite accept what he says on the basis that there will be regulations, and I apologise for taking up the time of the House.

§ Mr. Trew
Just so as to make the matter quite clear, I understand that the regulations to which my hon. Friend the 1753 Minister of State refers are covered by Clause 7(4). I see that my hon. Friend agrees, and in view of his explanation I beg to ask leave to withdraw the Amendment.

§ Mr. Edward du Cann (Taunton)
I beg to move Amendment No. 210, in page 31, line 9 and references to a contract for the supply of goods or services include reference to a trust imposing on any party thereto the obligation to supply goods or services". The questions I wish to raise with my hon. Friend are in some respects analagous to those so clearly deployed on the last Amendment. They relate to the effect of Clause 42 on authorised unit trusts.
I shall be brief, in deference to the obvious wishes of the House, but I cannot refrain from saying that it is increasingly the case that the method by which we deal with these matters on Report is unsatisfactory. It may be convenient for the Minsters—I am sure that it is—but it is not satisfactory from the point of view of wise debate, of control of the executive and of democracy.
This is a matter which affects a large number of people, certainly in excess of 2 million and perhaps 3 million. It certainly affects not less than 250 authorised unit trust schemes, that is to say unit trust schemes the investments, units or shares in which can be freely sold to the general public.
I have an indirect interest to declare, but no longer a direct interest. That is a matter of history.
The main purpose of Clause 42 is to allow the parties to a fixed price contract to adjust the price by the amount of any tax introduced after the date of the contract. The underlying principle of adjustment of contracts on changes in tax (that is what the short description of the Clause says) is accepted. I have no wish to quarrel with that. It clearly should embrace the services supplied by the managers of an authorised unit trust scheme under the trust deed.
Such a supply is necessarily at a fixed price in accordance with the terms of the trust deed by which the unit trust is constituted. The price could only be increased by statute or by the authority of all the investors under the trust in general meeting.
1754 The question is simply, what does the proposed Statute say? In relation to unit trusts, an the view of those who have responsibility as trustees or managers of a unit trust, the words of Clause 42 may be regarded as unclear in three respects.
It is not clear whether the references to a "contract" in line 1 and line 4 include references to an authorised unit trust. The concept of a unit trust is quite distinct, historically and currently, from that of a contract. The managers owe obligations to the trustee and the investors, the unit holders, as beneficiaries of the trust. Individual unit trust managers and the Association of Unit Trust Managers have been clearly advised in the past that the nature of the managers' obligations is that of a quasi-trustee.
My first question is whether or not this reference to a contract includes reference to a unit trust? If my hon. Friend says that that is so, I shall have nothing further to say on that point, but the Bill as drafted is not clear.
The second matter of lack of clarity is this: it is true that on a purchase, the moment an investment is made, the practice is for a contract note to be issued to the investor. However, this merely obliges the managers to issue a specific number of units at a specified price. It is not clear from the wording that it would be creating a continuing contractual relationship between the managers and the unit holders.
If my hon. Friend advises me that such a continuing contractural relationship is created, my point of anxiety disappears.
The other matter about which concern has been expressed is this: In the Bill the relevant tax change must occur after the making of a contract. It is unclear whether the relevant time is the date of purchase of units by a unit holder or the date of execution of the trust deed—which is the date on which the authorised scheme was established. Logically, I suppose that one should argue and take the view that the only relevant moment is the date of the trust deed, as it is at this point that the amount of the annual charges is crystalised, and again, as right hon. and hon. Members will know, it is in that document that the quantum of charges is expressed and agreed to. However, 1755 whatever the logic may appear to be, it is at least arguable that a new contract is created whenever a unit sale is made. That is the third point which seems unclear and about which I should be grateful for assurance from my hon. Friend.
12.15 a.m.
If those with whom I have been associated in the past in this industry, and whom I know so very well, and I all take the view that the Clause as drafted is unclear in these three respects, it is in order to remove these three ambiguities and to eliminate the need for unit holder meetings to be held by every authorised unit trust in the United Kingdom—more than 200 of them—that these changes and clarifications are proposed.
I have long been of the view—I am sure the whole House would agree with it—that good law is clear law. My hon. Friend has heard the points of anxiety. I assure him that these views are genuinely held. They are by no means carelessly expressed. If my hon. Friend feels them to be justified in any respect, I hope that he will view and accept the Amendment as rendering the law clearer than it appears at present. If, on the other hand, he can advise me that the anxieties of which I have spoken are misplaced and that there is no need for anxiety of any sort, I should be only too happy to ask the House to give me leave to withdraw the Amendment.

§ Mr. Nott
Although the House is anxious to make progress, I can tell my right hon. Friend that I am quite happy to debate this matter at considerable length if he would wish to do so. He seemed to be implying that we wanted to pass quickly over the Amendment. But we certainly want to deal with it thoroughly. I am referring to my right hon. Friend's opening remarks about the way in which the Report stage was being conducted.
As my right hon. Friend said, the arrangements under which a unit trust operates involve the creation of a trust by the manager of the fund in favour of an independent trustee who holds the assets of the funds on trust for the unit holders. The manager's remuneration is a charge of the assets as required by the deed. As this matter has been raised in 1756 representations to us, we have examined what we are assured is a typical trust deed and have reached the conclusion that besides establishing the trust the deed also expresses a contract between the manager and the trustee for the supply by the former to the latter of the service of investment management and certain administrative services, the consideration being the charge on the assets. We therefore see no reason to doubt that Clause 42 applies in this case and we have informed the Association of Unit Trust Managers that that is our view.
Summarising this matter and answering in a rather more crisp way my right hon. Friend's three points, first, we believe that the kind of trust deed which is entered into here constitutes a contract for the purpose of Clause 42; second, that a continual relationship is created; and third, that the execution of the trust deed is the point where the matter commences.
I hope that I have covered my right hon. Friend's anxieties and that he will consider that answer sufficient for his purposes and feel free to withdraw his Amendment.

§ Mr. du Cann
My hon. Friend has been typically clear and typically courteous. First, may I add a word on the question of this Report stage. I make no complaint of the conduct of my right hon. and hon. Friends. As always, they do their work extraordinarily well, and with great regard to the wishes and anxieties of the House. I complain of something different, that is, the way in which this and other Finance Bills are presented to the House. I feel that the House as a whole ought to consider this matter for future. I think that what we do suits the Executive very well, but I am not at all sure that debates at this time of night and the taking of so many matters on Report in this way is the best way to go about our business.
On the issues which I presented by the Amendment, I repeat what I said at the outset. My hon. Friend has been typically clear and courteous. He has exactly answered the points of anxiety which I had in mind. In view of his clear assurances, I beg to ask leave to withdraw the Amendment.