§ '(1) Relief shall not be given to any person under any provision of the Tax Acts in respect of any payment of interest if a scheme has been effected or arrangements have been made (whether before or after the time when the payment is made) such that the sole or main benefit that might be expected to accrue to that person from the transaction under which the interest is paid was the obtaining of a reduce Lion in tax liability by means of such relief as aforesaid.
§ (2) In this section "relief" means relief by way of deduction in computing profits or gains or deduction or set off against income or total profits.
§ (3) Where the relief is claimed by virtue of section 259(6) of the Taxes Act (group relief) any question under this section as to what benefit might be expected to accrue from the transaction in question shall be determined by reference to the claimant company and the surrendering company taken together.
§ (4) This section applies—
- (a) where the payment is after 8th June 1976; and
- (b) as respects relief—
- (i) under section 248 or 259(6) of the Taxes Act in relation to the total profits for an accounting period beginning after that date or for any part falling after that date of an accounting period beginning earlier; or
- (ii) under section 75 of the Finance Act 1972 in relation to income for the part of the year 1976–77 falling after that date,
§ (5) For the purposes of subsection (4)(b) above—
- (a) the total profits for part of an accounting period shall be so much of the total profits for the whole period (reduced by any relief otherwise than in respect of the payment or payments in question) as is apportioned to that part;
- (b) the income for part of a year of assessment shall be so much of the income for the whole year (reduced by any relief otherwise than as aforesaid and otherwise than under Chapter II of Part I of the Taxes Act) as is apportioned to that part;
§ Brought up, and read the First time.
§ The Financial Secretary to the Treasury (Mr. Robert Sheldon)I beg to move, That the clause be read a Second time.
The purpose of the clause is to remove the eligibility for tax relief for interest 415 paid under a scheme where the sole or main benefit that might be expected to accrue from the loan transaction would be the obtaining of such a relief. It gives effect to the Government's intention detailed in a reply by my hon. Friend the Minister of State on 8th June, when he announced that the Government intended to introduce legislation on Report to counter avoidance by means of artificial interest payments. These concern schemes of a quite artificial character which involve the payment of interest where no genuine provision of finance to the payer has been incurred and no genuine expenditure has been made by him. These schemes are contrived and artificial. Some have even involved payments of so-called interest in advance for nearly 100 years. The artificiality is blatant and the avoidance serious. The sums of money involved have been very large.
Under the existing rules, annual interest is a charge on income and allowable as a deduction for corporation tax. If the interest exceeds the profits and was paid for the purpose of the company's trade or business, it can be carried forward against future profits. For a group of companies group relief is applicable. These avoidance devices have been used on a substantial scale. On the information available to the Government, as much as £50 million in tax may be involved. We are not sure whether that is the total.
There is clearly an urgent need to protect the revenue from such avoidance devices. The Government have carefully considered their approach to the matter. We realise the problems when we consider a test based on "sole or main benefit". We have come to accept the need for that test because the rules governing the allowance of interest are extremely intricate and complex. Any attempts to stop such schemes by tinkering with the present rules could have created difficulties for perfectly acceptable operations, and at the same time, we could not have been sure that the loopholes would be completely closed.
An alternative was to defer the legislation until next year. There were problems about that as well, because of the announcement that had been made and the uncertainty that would have been created for a number of innocent trans- 416 actions. We have been very much concerned about the need to protect the innocent operators from being caught by such provisions.
The clause says that the new rule will be applied to all payments made after 8th June and to payments made before that date if they would otherwise be relieved against profits or income falling after that date. That is an essential part of the legislation, arising from a number of conspicuous cases that have reached the headlines. I am unable to comment on them in detail, but I may have said enough to show the necessity for the clause.
§ Mr. David Howell (Guildford)We understand that this is an anti-avoidance clause. It is proper for the Government to seek to protect the revenue. We understand their motives, but it is a melancholy reflection that they should put so much energy into the ceaseless closing up of loopholes. It is part of the inevitable outcome of a high-tax régime, which the Government insist on running. If that is how they wish to do things, though we think that it is wrong and counterproductive, they will create loopholes, and it is their duty to introduce anti-avoidance measures to close those loopholes.
We should like more reassurance on the "sole or main benefit" test. The hon. Gentleman said that he was anxious to protect the bona fide borrower in every way, and that should be the aim of the House as a whole in approving the clause. Let us suppose that a borrower raises a substantial loan involving substantial interest payments, and various arrangements are made which look as though they they would lead to avoidance. However, it is done in good faith, but subsequently the borrower finds that he had no need for the loan.
He will then be left in a situation in which the "sole or main benefit" would, temporarily, until he has made new arrangements, be one flowing from the fact that there was a substantial interest and an offset against his other tax liabilities. They may from innocent motives be caught by this clause. I can think of circumstances in which bona fide borrowers could find themselves, for reasons that were not apparent when the loan was raised, caught by the clause, 417 although they had no intention of employing the kind of avoidance arrangements against which this measure is aimed. I hope that the Financial Secretary will assure the House that he has built into the clause adequate safeguards to ensure that bona fide borrowers are not caught by its provisions.
§ Mr. Richard Wainwright (Colne Valley)Liberal Members welcome this clause, but we can hardly refrain from commenting that its appearance in the history of corporation tax has been extremely late. The loss of money and the loss of taxpayers' morale are very serious indeed. I understand that we have not heard the last of Press revelations over the use of this device. The irony is that at bottom it is a simple device indeed.
Let it not be said that this is some highly sophisticated contraption that has been thought up. It is simply a toy horse that has got through the gaping hole in the legislation. If only the Government and the Inland Revenue would seriously and genuinely engage with the accountancy profession in proper pre-legislation consultation instead of putting up an appearance of doing so, it would secure co-operation in spotting loopholes which, when examined, turn out to be glaringly obvious.
Damage to taxpayers' morale is caused by the fact that this has been so simple. We are glad at long last, although too late in the day after much revenue has been lost, that this loophole appears to be on the way to being closed.
§ Mr. Nicholas Ridley (Cirencester and Tewkesbury)I was interested to hear the new phrase introduced into these debates by the hon. Member for Colne Valley (Mr. Wainwright)—namely, the term "taxpayers' morale". I believe that the taxpayers' morale is pretty low as a result of the amount of the tax they have to pay. I doubt whether their morale rises significantly when they feel that some other poor unfortunate devils have been caught by some loophole-closing device. I think that there would be less need for loophole closing if it were not for the general restrictiveness of the tax system and the high level of tax.
I support the clause but I do not do so with the alacrity and glee shown by the hon. Member for Colne Valley, whose 418 morale no doubt rose merely because of the appearance of this provision on the Amendment Paper. No doubt the hon. Gentleman's morale is in need of a little bit of boost. Obviously, something must be done to improve the morale of the Liberal Party. If it satisfies that test, that is a reason for welcoming the clause. I am sorry that the Liberal Party has fallen so low that it has to find a lolly-pop to cheer itself up.
This problem arose because of the complicated nature of the 1974 Act, which set out the £25,000 limit and the many qualifying conditions on the interest at that time. The Standing Committee that waded through that Finance Bill found its provisions immensely complex. I do not believe that these matters need to be so complex. I think that all personal interest should be allowable, or none. The £25,000 limit is a most complex and unhappy compromise between the two.
5.45 p.m.
I wish to refer to the phrase "sole or main benefit" in the clause. That could be misinterpreted, particularly by an over-zealous Revenue inspector. Of course one receives a benefit every time one gets loan interest that is tax deductible. Clearly, there are many projects of this kind. If somebody wishes to borrow money to start a business or to buy a house, both of which are purposes for which interest is liable, he would not take on that task unless the interest were allowable. Indeed, the person concerned could not pay the interest on the sum borrowed if he had to pay it out of his taxed income. Therefore, the whole scheme hinges on the person being able to set interest against tax.
It could be argued that the main benefit accrues to him because the interest is tax deductible. The words in the clause are very wide. Quite innocent people may be caught by this system. It will rest very much on the discretion of the tax inspector.
The Financial Secretary said that there may be innocent transactions which he would not want to catch. I thought that he was going to avoid catching them by using his discretion or that of the tax inspector, but that is not good enough. Taxation matters must be precise. Perhaps he would explain a little more fully the meaning of the words "sole or main benefit" and assure the House that there 419 is no discretion in the matter. If the Minister makes these matters clearer, I am sure that the House will be happy to agree to this clause.
§ Mr. John Cronin (Loughborough)I welcome the new clause. I cannot accept the view that tax avoidance schemes are brought in only when taxation proposals are introduced by a Labour Government. I recollect on earlier Conservative Finance Bills facing similar avoidance provisions. The answer is that, come what may, tax avoidance will be a permanent industry, whatever the Government in power.
§ Mr. RidleyDoes the hon. Gentleman agree that as one increases the level of taxation, the point arrives when people begin to seek tax avoidance schemes, but if one decreases the level of the taxation people surely will cease to bother to pursue such schemes.
§ Mr. CroninI would not accept that. I believe that tax avoidance schemes are necessary. I do not think that the level of tax has more than a marginal effect on the situation.
Each year as we debate Finance Bills we hear about some new tax avoidance scheme which has to be dealt with by an appropriate new clause or amendment. I wonder whether we shall always have to find ourselves in the situation of changing tax provisions only after many people, because of gaps in the legislation have made large sums of money. Is there not some regular system of surveillance by the Treasury to enable corrective action to be taken in the next Finance Bill? It appears that we introduce these avoidance provisions only after gigantic sums of money have been made by the taxpayer. Therefore, may we be told whether the Treasury is taking action on this score and whether there is constant monitoring of these situations?
§ Mr. Robert SheldonI begin by referring to the point made by my hon. Friend the Member for Loughborough (Mr. Cronin) about the need for surveillance and monitoring. This is a very important point that should exercise our attention. The difficulty arises from the delay arising between the initial introduction of a scheme and the time when it becomes known to the Revenue. We find that we are able to shorten this 420 period, but the point is being further examined. We shall aim for a shortening of the time lag.
I accept the point made by the hon. Member for Colne Valley (Mr. Wainwright) about the need for close contact with the accountancy profession. This liaison has been improving in recent years under Governments of both complexions, but more progress needs to be made in that direction.
The hon. Member for Guildford (Mr. Howell) rightly asked for some assurance that there would be no problem for innocent parties seeking arrangements whereby they undertook to pay interest for genuine business purposes. I can give the hon. Gentleman the assurance that those paying true interest for genuine business purposes will not be caught by this scheme. To give him the definition, which I think also deals with the question put by the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), in a genuine commercial scheme the main benefit is to secure finance. If that is applicable, those people will not be caught by the main benefit test and they will be perfectly free to go about seeking and undertaking any transactions which fall within that definition.
The natural anxiety of the hon. Member for Guildford is that these matters are closely watched. I can give him that assurance. That is to the advantage of the kind of people mentioned in this debate so that we do not entrap those perfectly legitimate and proper cases where people are prepared to pay the interest and get it allowable against tax. We are concerned about people who resort to some of those very peculiar devices of the kind which show an immense amount of ingenuity and, as the hon. Member for Guildford said, with such unfortunate results.
§ Mr. F. P. CrowderI feel that this particular new clause strikes at the whole concept of society as it is today. We are in the position that the Government of the day are taking the view that if families save money which, after all, is hard won, and are earning an income from that money, that money should be heavily taxed. To my mind, that is all wrong. I do not think it right that earnings from investments, which have been saved from hard work, should be 421 treated any differently from earnings by a surgeon, or a barrister—I speak for myself—or someone in any other walk of life.
I quite appreciate that we have got to a situation now where there are loopholes which the Treasury is endeavouring to close. But at the end of the day, where are we? The present position means that it is not worth earning money and investing it in investments and savings because if one earns enough at the top rate, one will pay 98 per cent. in tax. That is not the way of life in England, and I hope that it never will be.
It seems to me that for the past 15 years what has been happening is that we in the House, be it the Labour Party or the Conservative Party, have imposed penal taxation upon earners and people who derive their benefits from unearned income, and for one reason only—to satisfy the trade unions, which at the moment govern this country, as I well know.
Admittedly, when I first came into this House some 26 years ago those people used to be on the Labour Benches. They are no longer here and we cannot talk to them and deal with them. Such people were very sensible and helpful, Instead, today we have a lot of broken down university lecturers and television people.
But the tax system worked fairly well on the basis that loopholes were allowed and on the basis that the trade unions were satisfied with the situation as it was, and everybody managed to keep up his small vicarage, or country house, or whatever it might be. A nod is as good as a wink, but I notice that in this Parliament we have a very different attitude in that everything has to be tidied up and every loophole has to be closed. We have to have a few loopholes in life, because they give one a little bit of elbow room.
Can the Minister imagine anything more ghastly than a young man of 21, 22 or 23 setting out to make a career in this country? How can he make any capital which he can hope to retain? If that young man succeeds in his profession, he might earn £15,000, £20,000, or £28,000. If my tax tables are right, one would have to earn £30,000 in this country to retain £10,000. That is not 422 very much. When we bring inflation into consideration it is equivalent to about £4,000 or £5,000 about 14 or 15 years ago. There is no hope of a young man in this country today building up a fortune or a business.
§ Mr. George Cunningham (Islington, South and Finsbury)The hon. and learned Member does not have his tables right.
§ Mr. CrowderI think I am absolutely right. I am glad the hon. Gentleman intervened. I have them in mind. I think the hon. Gentleman will find that on an income of £30,000 one keeps £11,000, and on £15,000 one keeps about £8,000. I should be glad to give way to the hon. Gentleman if I am wrong. But where is the saving when one has to pay 12p for that ridiculous newspaper The Times which, unfortunately, one has to read? That is the present situation in this country.
§ Mr. Ian Gow (Eastbourne)My hon. and learned Friend makes remarks about The Times, but the editor of The Times wrote a very powerful, and my hon. and learned Friend may think, irrefutable argument about the importance of monetarism in today's edition. Perhaps he should read that.
§ Mr. CrowderI had the advantage of reading it but, equally, I had the disadvantage of having to pay for it. After all, we are not paying 2d for The Times today: we are paying 2s. 4d. [An HON MEMBER: "12p."] That is 2s. 4d. All we need to do, if we are charged 12p is to put a line through and that is it.
The situation is becoming increasingly serious. If we are to close these loopholes as the Minister suggests, we shall all be living in "two up and two down" houses. We should not be able to keep a house of any consequence, however small. We shall be gradually pushed into being a Communist State, and I am sorry to have to say that. I do not think that is what the Chancellor wants.
6.0 p.m.
If we are to tax people—combined with inflation—on the basis of this Finance Bill, they simply will not survive. Some people have the good fortune to have works of art which they can take to the sales rooms in Bond Street, and they can just survive and keep their 423 noses above water. We shall destroy our heritage if we go on like this.
For goodness' sake, let a few loopholes remain. It will keep the trade unionists happy and, in any case, they will not understand them. If we go on in this way, we shall get into the situation with which we were faced yesterday—and a more disgraceful performance was not to be found—when the Leader of the House attempted to say why there must be a differential among Members of Parliament, who are to have another £6 a week. Can anyone beat that? I shall never forget a Labour Member saying to me the other day, "There is no status, there is no money and the hours of work are quite impossible". Are we to degrade this great nation into that sort of circumstance through the Finance Bill? It simply is not on.
§ Mr. George CunninghamIs this in order?
§ Mr. CrowderNo, of course it is not. So I will sit down.
§ Mr. SpeakerI am obliged to the hon. and learned Member.
§ Question put and agreed to.
§ Clause read a Second time, and added to the Bill.
§ 6.0 p.m.
§ Mr. SpeakerMr. Denzil Davies, to move New Clause 18.
§ Mr. RidleyCan you tell me, Mr. Speaker, why the Government new clauses are in order up to New Clause 9 and then we go to New Clause 18. followed by New Clauses 19, 20, 23 and 24, and then back to New Clause 10? Does not 10 normally come after 9? Is it just that Government new clauses always come first?
§ Mr. SpeakerThe answer is simply that how the new clauses are numbered depends on the order in which they are handed in.
§ Mr. RidleyFurther to that point of order, Mr. Speaker. I think that the order in which they were handed in was Government New Clauses 7, 8 and 19 and then a number of Opposition new clauses—Nos. 10 to 17—and then another lot of Government new clauses —Nos. 18 to 20 and 23 and 24. As they 424 are numbered in the order in which they are handed in, why are they not taken in the same order? No doubt there is a perfectly good explanation.
§ Mr. SpeakerI am sure that there is. I shall try to find out and let the hon. Member know.