PARTNERSHIP RETIREMENT ANNUITIES (Hansard, 16 July 1974)

HC Deb 16 July 1974 vol 877 cc288-94 288

§ (1) Where a person (in this section referred to as the former partner) has ceased to be a member of a partnership on retirement, because of age or ill-health or on death and, under—

(a) the partnership agreement; or
(b) an agreement replacing the partnership agreement or supplementing it or supplementing an agreement replacing it; or
(c) an agreement made with an individual who acquires the whole or part of the business carried on by the partnership;

annual payments are made for the benefit of the former partner or his widow or a dependent of his and are for the purposes of income tax income of the person for whose benefit they are made, the payments shall be treated as earned income of that person, except to the extent that they exceed the limit specified in subsection (2) below, and shall not reduce the income which is chargeable as investment income of any other person.

§ (2) The limit mentioned in subsection (1) above is 50 per cent. of the average of the amounts which, in the best three of the relevant years of assessment, were the former 289 partner's shares of the relevant profits or gains; and for this purpose—

(a) the former partner's share in any year of the relevant profits or gains is so much of the relevant profits or gains as fell to be included in a return of his income for that year; and
(b) the relevant profits or gains are the profits or gains of any trade, profession or vocation on which the partnership or any other partnership of which the former partner was a member was assessed to income tax; and
(c) the relevant years of assessment are the last seven years of assessment in which he was required to devote substantially the whole of his time to acting as a partner in the partnership or those partnerships; and
(d) the best three of the relevant years of assessment are those three of them in which the amounts of his shares of the relevant profits were highest;

but where, in any of the relevant years, the circumstances were such that any of the profits or gains of a partnership were not assessable to income tax, paragraphs (a), (b) and (d) above shall apply as they would apply had those profits or gains been so assessable.—[Dr. Gilbert.]

§ Brought up, and read the First time.

§ Dr. Gilbert
I beg to move, That the clause be read a Second time.

§ Mr. Deputy Speaker
It will be convenient to take also new Clause No. 28.—(Earned income).

§ Dr. Gilbert
The effect of the clause is to provide that annual payments made by the continuing members of a partnership to a former partner who has retired because of age or ill-health shall be treated as earned income in the hands of that retired partner. Similarly the House will be glad to learn that the effect of the clause is that annual payments to the widow or dependants of a former partner will also be treated as earned income.
The clause gives effect to an undertaking which I gave in Standing Committee. I shall not seek to detain the House for long in discussing its effect. However, I should point out that it is somewhat more restrictive than is new Clause 28 which we are debating at the same time and which is in the name of the hon. Member for Croydon, South (Mr. Clark). First, there is a limit on the amount of annuity which will qualify as earned income of the retired partner under our proposals. The limit is related to the partner's share of the profits in the last seven years of which he acted as a full- 290 time partner, and is confined to 50 per cent. of the average of the partner's share in the best three of those seven years. This is a somewhat convoluted formula, but we thought it right to try to get a formula which would provide a picture of the average spread over a period of years, taking good years and bad years. The option is available to partners to select the best years, taking the mean figure.
I recognise that it could be said that the relief is self-policing since any annuity paid by a continuing partner is paid out of his own pocket rather than as compensation paid from corporate funds. On the other hand, we thought it right to have a limit in the clause. I do not think it is likely to bite very hard on the situation and the House will agree that it is a moderate proposal.
The second difference is that the retirement annuity, although ranking as a deduction from the continuing partner's earned income up to the highest rate of earned income, will not rank for investment income surcharge. This is to preserve a certain symmetry because if the annuity to the retired partner is to be regarded as earned income in his hands, we consider it appropriate that the relief should relate only to the earned income of the continuing partners. I hope the House will regard those two minor constraints as reasonable and will accept the clause in the spirit in which it is moved.

§ 6.0 p.m.

§ Mr. William Clark
I am grateful to the Financial Secretary for fulfilling the undertaking that he gave in Committee on a similar new clause.
I accept the constraints that the hon. Gentleman has put on partnership annuity. I think that this course will be welcomed by ex-partners and by widows of ex-partners of professional firms. Even with the constraints, I think that the new clause will remove an injustice and anomaly in our tax system.
It always struck me as odd that a self-employed person may not take advantage of the 1956 Act to pay for a self-employed pension. Many partners retire not having been able to build up a pension fund for themselves. To a certain extent the clause has removed the anomaly. I welcome it and am grateful to the Financial Secretary for bringing it 291 forward. I hope that the other new clauses will show the same generosity.
I am sure that the Financial Secretary will agree that in Committee upstairs the Opposition put forward constructive suggestions to a hastily produced Finance Bill. I am delighted that the Chancellor of the Exchequer and his colleagues have seen fit to accept many of our representations and to admit, as they have, that the Opposition as a team did very constructive work on a hastily prepared Finance Bill.

§ Mr. Nott
I am sure that, without having read the proceedings in Committee upstairs, what my hon. Friend the Member for Croydon, South (Mr. Clark) said does not need any proof. I believe that the Opposition put up an admirable show in Committee.
I welcome the clause. It is helpful. I want to make only one minor point, and I do not mind if the Financial Secretary does not reply to it.
I am in favour of a limit. The Financial Secretary said that this could be a self-policing matter, because the existing partners would not wish to pay out exaggerated sums to a retired partner. But I do not think that 50 per cent. is quite up to the norm which would be allowed in company pension schemes. Is it not below what an employee would receive as earned income under a normal company pension scheme? I realise that company tax arrangements on retirement pensions are complicated. I merely make the point that to say that 50 per cent., which is the average of the best three years, of pension or retirement income is to be taxed as investment income seems rather harsher as a limit than the limit for people who retire with company pension schemes. The limit which would be allowed by the Revenue in company pension schemes as a rough generalisation would be two-thirds of the final year's salary.

§ Mr. William Clark
As I read the clause—I hope that the Financial Secretary will clear any doubts that I have in mind—I understand that the 50 per cent. pension is based on the profits of the last seven years, taking three years as an average. That will determine the amount of annuity that is paid either to an ex-partner or to his widow.
292 Perhaps I may give my hon. Friend an example. If the best three years represent £6,000, the average is £2,000 over those three years, and the Exchequer is suggesting that £1,000 of that annuity will be treated as earned income. However, it does not necessarily follow that, because a partner enjoyed his full percentage of profits, after he retires he will enjoy the same percentage of profits. I think that 50 per cent. is a step in the right direction. It is not analogous to the two-thirds pension scheme applicable to an employee.

§ Mr. Nott
It may not be. I thank my hon. Friend for his guidance. It is not wholly clear to me. I was interested to know what the Financial Secretary would say about it. I should like to know whether it conforms broadly with what an employee would receive under a company pension scheme in terms of earned income. I welcome the clause. I think that my hon. Friend has done a good job in pressing the matter.

§ Mr. Peter Rees
I welcome the principle underlying this long-overdue measure of reform. I gladly pay tribute to the Financial Secretary for so flexibly accepting the representations made to him by the Opposition in Committee upstairs.
I intervene in the hope that the Financial Secretary will be able to clarify two points.
First, the payment that qualifies for earned income relief has to be made under

"(a) the partnership agreement; or

(b) an agreement replacing the partnership agreement or supplementing it or supplementing an agreement replacing it; or

(c) an agreement made with an individual who acquires the whole or part of the business carried on by the partnership."
As the House knows, if a partnership takes in one, two, three or four new partners, strictly speaking a new partnership is constituted. Does it follow that if the partners enter into a partnership agreement, possibly supplementing that regulating the relationship between the former partners, it will be regarded as an agreement replacing the original partnership agreement under subsection (1)(b)? The only doubt in my mind is that paragraph (c) seems to be limited to to an agreement made with an individual who acquires the whole or part of the business carried on by the partnership". 293 There is a slight area of doubt there which I am sure the Financial Secretary will be able to clarify. I want to make certain that if one or more new partners is or are taken into a partnership after the retirement of the partner who is claiming earned income relief, whatever agreement may regulate the relationship of that new partnership—because in law it is a new partnership—the agreement will qualify under subsection (1).
Secondly—we have talked about symmetry, and so on—I am a little perplexed about the wording of subsection (1) which provides that the annuity shall not reduce the income which is chargeable as investment income of any other person. I take it that it is not to count as a deduction where the partnership income for a year is not sufficient to support the annuity paid to a retired partner. Do I take it that the continuing partners cannot claim to deduct that annuity for tax purposes from their other income, or can they claim to deduct the excess from their next year's earned income, and so on? I am sure the hon. Gentleman will appreciate that there is a slight area of doubt there and it will be for the convenience of the House if he can clarify it.

§ Mr. David Howell (Guildford)
I think that the House is agreed that the clause is a step in the right direction. We welcome it. As the Financial Secretary said, this matter arose at a very late hour in the evening or early hour in the morning when he indicated that he was prepared to make a concession in the form of a new clause. The clause sets right a longstanding anomaly.
My hon. Friend the Member for Croydon, South (Mr. Clark) and my hon. and learned Friend the Member for Dover and Deal (Mr. Rees) have made certain points which I hope the Financial Secretary will be able to clarify. The inclusion of the clause in the Bill will mean that ex-partners, solicitors, accountants and professional people, who hitherto have been penalised, will now enjoy earned income relief and have their pensions treated to a certain extent as earned income. At a time when the professional and middle income groups are under attack by this Government, it is refreshing to see this little ray of sunshine in an otherwise dark sky of hostility towards people in such 294 professions. On that ground we welcome the clause.

§ Dr. Gilbert
I am glad to recognise the tribute paid by the hon. Member for Croydon, South (Mr. Clark) when he says that when he puts forward constructive amendments and there is a reasonable Government in office those amendments are adopted, and that when there is an unreasonable Government in office he can batter his head against the wall indefinitely and make no progress. I would not describe all the amendments and new clauses put forward by him and his hon. Friends in Committee upstairs as being constructive. Some verged on the idiotic. We shall come to that matter later, no doubt. At this stage, we can agree upon the merits of the new clause.
The hon. Member for St. Ives (Mr. Nott) asked some questions about the 50 per cent. limit. He is right to say that there are certain circumstances in which a controlling director may, under an improved superannuation scheme, receive a pension of up to two-thirds of his salary. We considered whether the same figure would be appropriate for these provisions. However, we bore in mind the fact that the rules that are operated administratively by the Superannuation Funds Office require that the amount of pension a controlling director may receive under an approved scheme is restricted to take account of any other annuity he may receive under a retirement annuity contract. There is no such restriction on retirement annuity contracts under these proposals. Therefore, we thought it reasonable to have a somewhat lower limit. I think it unlikely that it will bite frequently.
The answer to the first question asked by the hon. and learned Member for Dover and Deal (Mr. Rees) is that where there is a replacement partnership the situation is as he understood it. The answer to the hon. and learned Gentleman's second question is that if there are insufficient profits in any one year it would not be a question of offsetting the annuity against any other income; it would constitute a loss for the partnership which could be carried forward to future years.

§ Question put and agreed to.

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